Key Insights
- Triple Witching involves the concurrent expiration of stock options, stock index options, and stock index futures.
- This event takes place quarterly on the third Friday of March, June, September, and December.
- Trading volume and market volatility can spike as traders intervene with expiring positions, especially in the final hour of trading.
Unlocking the Magic of Triple Witching
Triple Witching days pave the way for elevated trading activity and increased volatility. Contracts are allowed to expire, generating the buying or selling of the underlying securities. Traders geared for derivative exposure need to finalize, extend, or counterbalance their open positions before the market closes.
Offsetting Futures Positions
A futures contract represents an agreement to execute a transaction for an underlying security at a set price and specified date. Consider an E-mini S&P 500 futures contract, valued at 50 times the index. At an index value of 4,000, this converts to a contract worth of $200,000.
To dodge executing at expiration, the contract owner will close by selling before it expires. Post-closure, ongoing exposure to the S&P 500 can be achieved by purchasing a new contract. This continuous process is called “rolling out” a contract, which many often focus on during Triple Witching.
On the expiration date, contract holders may either opt to avoid delivery or settle their gains and losses by trading to offset the purchase and sale prices.
Decoding Expiring Options
When options that are “in the money” expire, automatic transactions are spurred between contract participants. Call options remain in the money if an underlying security price eclipses the strike price, while put options do if the price drops below it. The convergence of such occurrences on Triple Witching heralds intensified market maneuvering.
Navigating Triple Witching and Arbitrage
Closures, openings, and offsetting trades during Triple Witching can spark price inefficiencies, captivating short-term arbitrageurs who seek profits from them. This activity can inflate trading volume towards the end of the market day yet doesn’t always result in high volatility.
A Look Back: An Instance of Triple Witching
March 15, 2019, marked noticeable trading activities attributed to the first Triple Witching of that year. Trading volumes went from the typical 7.5 billion shares to 10.8 billion, highlighting the significant surge and its potent effect on market activity.
Important Dates to Remember
Triple Witching unfolds every quarter on the third Friday of March, June, September, and December. Mark your calendars for:
Related Terms: stock options, index futures, index options, arbitrage, contract expiration.
References
- World Federation of Exchanges. “WFE Derivatives Report 2020”. Page 16.
- A . Gottesman. Derivatives Essentials: An Introduction to Forwards, Futures, Options and Swaps. John Wiley & Sons, 2016. Pages 41-2.
- CME Group. “E-Mini S&P 500 Futures - Specs”.
- A . Gottesman. Derivatives Essentials: An Introduction to Forwards, Futures, Options and Swaps. John Wiley & Sons, 2016. Chapters 2-3.
- Reuters. “Wall Street Gains With Tech; S&P 500 Posts Best Week Since November”.
- Yahoo Finance. “NASDAQ Composite”.
