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Triple Witching Day

This coming Friday is another triple witching expiration day. It happens four times a year. On the third Friday of every quarter (i.e., March, June, September, and December), three financial products, including index options, index futures, and single stock options, simultaneously expire on the same day.


On triple witching day, traders and investors will need to close out any outstanding hedges. The collective actions of these trades result in an increase in trading activities and expansion in volume.


Expirations are not the only thing that occurs on the third Friday of the quarter. Major indexes also schedule their quarterly and annual rebalancing to coincide with this date (i.e., S&P U.S. Indexes, FTSE Global Indexes, and Nasdaq 100 Index). Index rebalancing coupled with the expirations of options, index futures, and single stock options often translate to significantly higher trading volume and market volatility on triple witching days. The market on close order flows from index funds also tend to be substantially higher.


Is there a time when witching hour occurs?


It depends. Not all trades need to occur at the same time. Single stock trades occur at the close auction. Index products need to trade during the open auction. Opening stock auctions are more skewed toward index weight. Also, derivatives expire with the underlying stock requiring delivery. For instance, stock options have physical delivery. Exercised options tend to require one party physically delivering the actual stock to the counterpart. Index derivatives are cash-settled. Settled options occur with the exchange of cash from the profit or loss of the business day following expiration.


With either of the above scenarios, positions and hedges need to be closed or un-hedged. Although it is difficult to know whether underlying stocks and indexes will rally or decline during triple witching days, it is reasonable to expect a higher volume day and greater volatility.

Over the past year, triple witching week and triple witching expiration day have consistently experienced an increase in market volatility and expansion in volume.


Enclosed below from the triple witching expiration days for the past year. On 6/19/20, S&P 500 Index (SPX) declined 17.60 or -0.56%. On 9/18/20, SPX again plummeted 37.54 or -1.12%. Toward the end of the year on 12/18/20, SPX fell 13.07 or -0.35%, and on 3/19/21, SPX dropped 2.36 or -0.06%.


Will SPX again experience higher than normal volume and volatility this coming Friday, coinciding with yet another triple witching day?


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

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