Triple witching refers to the simultaneous expiration of three types of financial contracts: stock options, stock index futures, and stock index options. This event occurs quarterly, on the third Friday of March, June, September, and December. Traders and investors closely watch these dates as they often lead to increased trading volume, unusual price movements, and heightened market volatility.
Key Takeaways
- Triple Witching Dates: These occur four times a year, specifically on the third Friday of March, June, September, and December.
- Increased Activity: Traders may close, roll out, or offset their positions, particularly in the last hour of trading, known as the "triple-witching hour."
- Impact on Prices: The expiration of contracts can cause buying or selling activity, impacting the prices of underlying assets.
What Happens on Triple Witching Days?
On triple witching days, traders typically engage in significant activities related to the expiring contracts. This includes:
- Offsetting Positions: As contracts near expiration, traders might close their positions to avoid having to finalize purchasing or selling the underlying asset directly.
- Rolling Contracts: Traders often roll their positions forward by selling expiring contracts and simultaneously buying contracts that expire in a future month to maintain their market exposure.
The surge in trading activity can lead to increased volatility and price shifts as traders seek to optimize their final positions before the contracts expire.
Expiring Options: Implications and Strategies
Options that are "in the money" can lead to automatic transactions between buyers and sellers of the contracts. For example:
- Call Options: These are profitable if the underlying asset's price exceeds the strike price. If a trader is holding a covered call option, they risk having their shares called away on expiration if the option is exercised.
- Put Options: These become valuable when the asset price falls below the strike price, engaging the significant trading activity similar to call options.
Traders may adopt various strategies around triple witching, including:
- Arbitrage: Short-term traders may look to exploit price discrepancies between the options and the underlying asset, taking advantage of mispricing before these contract expirations.
- Straddle Strategy: Holding both call and put options with the same strike price can help traders profit from large price swings.
The Role of Gamma Hedging
Gamma hedging is a technique used by traders to manage the risk associated with changes in an option's delta. On triple witching days, this strategy can lead to an interesting phenomenon known as "pinning the strike."
Pinning the strike occurs when the price of the underlying security moves close to widely held option strike prices as traders hedge their exposures. This can create uncertainty for options traders regarding whether to exercise their long options or manage their short positions effectively.
Examples of Impact
The impact of triple witching can be vividly seen through historical trading activity. For instance, on March 15, 2019, the first triple-witching day of that year saw U.S. market exchanges report a staggering 10.8 billion shares traded, significantly above the 20-day average of 7.5 billion shares. The prior week led to notable gains in major indexes like the S&P 500, Nasdaq, and DJIA, yet the actual performance on triple witching day itself showed more modest price increases.
Schedule of Future Triple Witching Dates
Here are the upcoming triple witching dates for the next few years:
2024
- March 15
- June 21
- September 20
- December 20
2025
- March 21
- June 20
- September 19
- December 19
2026
- March 20
- June 19
- September 18
- December 18
Frequently Asked Questions
What Is Witching and Why Is It Triple?
The term “witching” comes from folklore, denoting the hours around contract expiration as a potentially turbulent time for traders. "Triple" indicates the three types of contracts involved.
How Does Triple Witching Affect Individual Stocks?
It may lead to unusual price movements in individual stocks with significant derivatives trading activity. Smaller-cap stocks are often more affected compared to larger, more stable firms.
Are There Risks Associated with Trading on Triple-Witching Days?
Indeed, while some strategies can yield profits, they also carry heightened risk due to increased volatility and unexpected price behavior. Novice traders are advised to exercise caution.
What Is Quadruple Witching?
Quadruple witching refers to the simultaneous expiration of four types of contracts—stock options, index options, stock index futures, and single-stock futures. However, since single-stock futures ceased trading in the U.S. in 2020, the usage of this term has diminished.
Conclusion
Triple witching days represent significant events in the trading calendar, attracting the attention of traders and investors due to the potential for increased volume and volatility. Understanding the mechanics of these expirations can assist traders in navigating markets effectively, optimizing their strategies, and leveraging arbitrage opportunities. With careful planning and informed decision-making, traders can manage risks associated with these high-stakes trading days.