Options traders also find out if their options expire in or out of the money. On such days, traders with large positions in these contracts may be financially incentivized to try to temporarily push the underlying market in a certain direction to affect the value of their contracts. The expiration forces investing vs speculation traders to act by a certain day, causing trading volume in affected markets to rise. A triple witching day occurred on October 16, 1987, the Friday before the famous Black Monday on October 19, 1987. On that day, in a single trading session, the Dow Jones Industrial Average lost a staggering 22.6%.
Stock index futures and options are typically cash-settled, whereas you need to deliver the stock in case of single stock options. Triple Witching days, with their unique blend of volatility and opportunity, underscore the dynamic nature of financial markets. By staying informed, sticking to proven strategies, and seeking expert advice when needed, you can turn these seemingly chaotic days into just another step in their financial journey. The U.S. stock market witnessed significant volatility during the triple witching phase, culminating with the Dow Jones Industrial Average securing a gain exceeding 9%.
- Call options expire in the money, that is, profitable when the underlying security price is higher than the strike price in the contract.
- From basics to advanced trading strategies, our options mastery programs navigate every trader’s journey.
- For example, the seller of a covered call option can have the underlying shares called away if the share price closes above the strike price of the expiring option.
- Concurrently, the guardians of market liquidity—market makers and arbitrageurs—make their presence felt.
77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Concurrently, the guardians of market liquidity—market makers and arbitrageurs—make their presence felt.
Stock options are contracts that give the holder the right to buy or sell the underlying security by a specific expiration date and at a specific price, known as the strike price. The duration of options contracts varies, and one stock option contract typically represents 100 shares of the underlying company. To avoid this, the contract owner closes the contract by selling it before the expiration. After closing the expiring contract, exposure to the S&P 500 index can be continued by buying a new contract in a forward month. Much of the action surrounding futures and options on triple-witching days is focused on offsetting, closing, or rolling out positions. The underlying equity index options and futures generally cease trading the day prior (usually a Thursday).
In folklore, the “witching hour” actually happens in the dead of night, from 3–4 am. During the Middle Ages, the Catholic Church even banned people from venturing outside during this time, so as not to get caught in the chaos. 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. Alternatively, they might buy the contract to ride the wave up, then sell once the buying frenzy slows down. Besides the increased trading, the witching hour can also result in price inefficiencies and, hence, arbitrage opportunities.
As traders adjust or close their positions, there can be unusual movement in the stock’s price and volume. This is usually more pronounced in stocks with smaller market caps or those that trade heavily in the derivatives market. Caution is in order at this time since these price changes don’t often reflect shifts in the underlying company’s fundamentals.
What Are Triple Witching Days?
They delve into strategies that capitalize on the price variances among correlated financial tools, thereby championing market equilibrium. Another aspect to consider on how triple witching could indirectly impact markets is to look at index rebalancing. Index providers periodically tweak the constituents and weights accorded to those constituents in the index based on their methodology. I have been sharing insights about the markets, proven strategies, what works, what doesn’t and many powerful trading ideas. Triple witching, with its nuanced influences on markets, is nothing short of captivating.
Triple witching hour
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 for increased volume and volatility in the markets. As contract expiration deadlines approach the witching hour, trading activity usually surges as market participants rush to close or roll over positions before it’s too late. Thus, volatility frequently spikes during this frenetic final trading hour across the derivatives markets and their underlying assets, as speculative plays and hedging activities spill over to equities to whip up the market further. Triple Witching typically occurs on the third Friday of March, June, September, and December. During Triple Witching, traders and investors often try to close out their positions or roll them over into the next expiry month.
Is There Such a Thing as Quadruple Witching?
Triple witching day is consistently one of the most heavily traded days each year. The increased volume tends to lead to higher volatility and intraday price swings and stocks can be unpredictable on Triple Witching day. Writers and holders of futures and options contracts must exit their positions to avoid stock assignment if their position is in-the-money. That means all open derivatives need to be delivered (or at least the profit and losses for cash-settled contracts).
Triple witching emerges as a cardinal juncture in financial markets, recurring quarterly on the third Fridays of March, June, September, and December. It’s at this intersection that stock options, stock index futures, and stock index options draw the curtains, inducing a choreographed interplay amidst them and the broader markets. The intertwining of these three https://bigbostrade.com/ facets can weave a dense tapestry of trading actions that markedly influence the market. It’s essential for traders and investors to recognize the potential pitfalls and prospects during triple witching intervals. While the surge in trading volumes and unpredictability can open doors to gains, they also usher in the chance of abrupt and sizable downturns.
These vignettes spotlight the formidable sway of triple witching over market rhythms. When multiple derivative contracts converge towards their expiration, it’s akin to pouring gasoline on the volatility fire. For market players, being attuned to these periodic tempests and recalibrating strategies in anticipation can be instrumental in adeptly steering through the tempestuous waters of triple witching intervals. A frequent arbitrage avenue during triple witching emerges from the price rifts between stock index futures and their inherent indexes.
This stock market crash was the greatest one-day decline to occur since the Great Depression in 1929. It occurs when three different financial instruments expire on the same day. During Triple Witching, traders and investors often try to close out their positions or roll them over into the next expiration cycle, creating a significant amount of trading volume and volatility in the markets. Traders and investors need to be aware of this day and its potential impact on their positions and portfolios. Triple witching refers to the concurrent expiration of stock options, stock index futures, and stock index options. Such coinciding expirations can amplify trading volumes and market fluctuations.
For a market maker, at the instant that the derivatives expire, their hedge is no longer needed. In order to collapse their hedge safely, they need to close their hedge in the same auction that is used to price the derivative’s expiry. Triple Witching can increase trading volume and volatility, potentially causing prices to fluctuate more than usual. The intricate dance between triple witching and factors like options expiration and arbitrage dynamics adds layers to this financial event.
Put options are in the money when the stock or index is priced below the strike price. In both situations, the expiration of in-the-money options causes automatic transactions between the buyers and sellers of the contracts. As a result, triple-witching dates are when there’s an increase in these transactions. On June 18, 2021, a record number—$818 billion—of stock options expired, which led to nearly $3 trillion in “open interest,” or open contracts. On this day, the Federal Reserve also announced that it might raise interest rates in 2023 due to inflationary pressures.
Amidst the cataclysmic financial meltdown, an already turbulent market landscape was further shaken by the expiring contracts. Specifically, on December 19, 2008, the Dow Jones Industrial Average rode a rollercoaster, gyrating over 200 points throughout the day, only to culminate 65 points above its opening position. This fervent activity underpinned the compounded volatility injected by triple witching into an already fragile market milieu.