The Triple Witching Effect: How Witching Days Shape Market Behavior Traders’ Insight

We’ll go into more detail about Triple Witching, how it affects the market, and how you can work with it. So, while witching days stand out for active trading, the last witching hour stands out even more as the frenzy hits a maximum before the inevitable expiration and settlement activity in the moments ahead of the stock market close. Triple witching day is consistently one of the most heavily traded days each year.

Upcoming Triple Witching Days in 2023 & 2024:

For the week leading into the triple-witching Friday, the S&P 500, Nasdaq, and the Dow Jones Industrial Average (DJIA) were up 2.9%, 3.8%, and 1.6%, respectively. However, it seems much of the gains happened before the triple-witching Friday because the S&P 500 and DJIA increased only 0.50% and 0.54%, respectively, that day.

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For example, one E-mini S&P 500 futures contract is valued at 50 times the value of the index. If the S&P 500 is at 4,000 at expiration, the value of the contract is $200,000, the amount the contract’s owner must pay if the contract expires. Traders ought to brace for potential volatility spikes and be on guard for unexpected market shifts.

1. The fourth type of contract involved in quadruple witching, single-stock futures, hasn’t traded in the U.S. since 2020.
2. The event chart below shows the average course of Apple in the ten trading days before and after the Triple Witching expiration days.
3. The ripple effects of price shifts might prompt mutual funds and exchange-traded funds (ETFs) to readjust their stances, setting the stage for the market’s next act.
4. Positions are then typically reopened in contracts that expire at a later date.

Triple Witching: Definition and Impact on Trading in Final Hour

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With the demise of single-stock futures contracts, quadruple witching reverted to triple witching. These combined maneuvers swell the trading volume and can usher in marked market oscillations. Hence, during the triple witching phase, the marketplace becomes a hotspot for those keen on leveraging this volatility. Many traders might venture into speculative arenas, acquiring options Trading plattform contracts in the hope of a market tilt favoring them, a move that could culminate in lucrative outcomes. For example, contracts representing large short positions (those taken expecting the security price to drop) may be bid higher if traders anticipate that the contracts will be bought to close positions before expiration. When this happens, traders may sell contracts at temporarily high prices and then close them out before the end of the witching hour.

The simultaneous expirations generally increases the trading volume of options, futures, and their underlying stocks, occasionally increasing the volatility of prices of related securities. This convergence can lead to a surge in trading activity, making it a day of heightened volatility. This is not particularly bullish or bearish day, but it is a day full of unpredictable events such as trading volume surge, volatility increase, price distortions, liquidity crunch, etc. making it a very uncertain day. In addition to above-average volume, traders can expect increased volatility. SPX’s daily range expanded nearly 7% on triple witching days, and the average percentage return was -0.72% lower than the daily average.

While many investors are focused on Triple Witching Day itself, I decided to analyze a period of several trading days before and after the expiration date. These examples underscore the importance of caution and risk management during triple witching. While triple witching can be intimidating, it’s also an opportunity for prepared traders. If you understand the dynamics of triple witching and have a sound trading plan, you can use this volatility to your advantage. The triple witching day of March 17, 2000, coincided with the peak of the dot-com bubble. The technology-heavy Nasdaq Composite Index had soared to unprecedented heights, but cracks were beginning to appear.

Triple witching refers to the third Friday of March, June, September, and December when three kinds of securities—stock market index futures, stock market index options, and stock options—expire on the same day. Derivatives traders pay close attention on these dates, given the potential tradeview markets service review for increased volume and volatility in the markets. All this trading, closing out and exercising can cause a lot of volatility, but it’s more or less the same story two more times, for both stock index options and stock index futures. In sum, the expiration of all three combine to create extra volatility in the markets. Triple witching, marked by the synchronized expiration of stock options, stock index futures, and stock index options, unravels a tableau of arbitrage prospects for discerning traders.