What Is Triple Witching?

What Is Triple Witching?

Let me explain triple witching directly: it's the simultaneous expiration of stock options, stock index futures, and stock index options contracts, all on the same trading day. This event happens four times a year, specifically on the third Friday of March, June, September, and December. You should know that these expirations can lead to higher trading volume and unusual price changes in the underlying assets.

Key Takeaways

Triple witching means the expiration on the same day of stock options, stock index futures, and stock index options contracts. It occurs quarterly—on the third Friday of March, June, September, and December. These days can cause a spike in trading activity as traders close, roll out, or offset their expiring positions, particularly in the final hour of trading.

Understanding Triple Witching

I want you to understand that triple-witching days generate more trading activity and volatility because contracts allowed to expire trigger buying or selling of the underlying security. If you're a trader seeking only derivative exposure, you must close, roll out, or offset your open positions before the close of trading on these days. These days, especially the final hour before the closing bell at 4 p.m. Eastern time—known as the triple-witching hour—can see spikes in activity and volatility as positions are managed.

You might recall that single-stock futures, which last traded in the United States in 2020, were once grouped with these, creating 'quadruple witching.' But they never attracted much capital or interest compared to stock options.

Offsetting Futures Positions

A futures contract is an agreement to buy or sell an underlying security at a set price on a specified day, and it mandates the transaction after expiration. For instance, one E-mini S&P 500 futures contract is worth 50 times the index value—if the S&P 500 is at 4,000 at expiration, the contract value is $200,000, which the owner must pay if it expires.

To avoid this, you close the contract by selling it before expiration. You can then continue exposure by buying a new contract in a forward month—this is rolling out. Much of the action on triple-witching days focuses on offsetting, closing, or rolling out positions. On expiration, you can choose not to take delivery and instead close by booking an offsetting trade at the prevailing price, settling gains or losses. You might also extend by offsetting and booking a new contract forward, known as rolling the contract.

Expiring Options

Options that are in the money work similarly for holders of expiring contracts. For example, if you're the seller of a covered call and the share price closes above the strike, the underlying shares can be called away. You can close the position before expiration to keep the shares or let it expire and lose them.

Call options are in the money when the underlying price is higher than the strike; puts when it's lower. In both cases, expiration of in-the-money options causes automatic transactions between buyers and sellers. This is why triple witching, with all three contract types expiring, increases trading.

Triple Witching and Arbitrage

Much of the trading in closing, opening, and offsetting contracts on these days squares positions, but the activity surge can create price inefficiencies. These draw short-term arbitrageurs looking to profit. Such opportunities can drive heavy volume into the close, as traders exploit small imbalances with quick round-trip trades.

Tip on Volatility

Despite the overall increase in trading volume, triple-witching days do not necessarily lead to high volatility—keep that in mind.

An Example of Triple Witching

Take Friday, March 15, 2019, the first triple-witching day of that year. Trading volume ramped up, with 10.8 billion shares traded on U.S. exchanges, compared to an average of 7.5 billion over the previous 20 days. The S&P 500, Nasdaq, and DJIA were up 2.9%, 3.8%, and 1.6% for the week, but gains on the day itself were modest at 0.50% and 0.54% for the S&P 500 and DJIA.

Triple vs. Quadruple Witching

The terms triple and quadruple witching describe the same event on those third Fridays since 2020. Triple witching involves three contract types: stock options (right to buy/sell a stock at a specified price), stock index options (on indices like S&P 500), and stock index futures (obligating purchase/sale at a set price). Quadruple included single-stock futures, but they haven't traded in the U.S. since 2020.

What Is Witching, and Why Is It Triple?

In trading lingo, the witching hour is the time of contract expiration, often Friday at close, when things can get unpredictable. It's triple because three types expire: index options, single-stock options, and index futures.

Can Triple Witching Impact Stocks Beyond Broad Market Volatility?

Yes, it can affect individual stocks with large expiring options or futures. As traders adjust, you might see unusual price and volume moves, especially in smaller-cap stocks or those heavy in derivatives. These changes often don't reflect company fundamentals, so approach with caution.

Are There Strategies for Triple-Witching Dates?

One approach is seeking arbitrage from price discrepancies between stocks and derivatives. Another is a straddle—holding put and call options with the same strike and expiration to profit from swings. These carry risks and aren't for inexperienced traders.

What Are Some Price Abnormalities on Triple-Witching Dates?

A notable one is prices tending toward strike prices with large open interest due to gamma hedging, which minimizes delta risk. Delta is the option's sensitivity to underlying price changes. This can 'pin' the price at the strike, creating pin risk for traders unsure about exercising near-the-money options or assignments on shorts.

The Bottom Line

Triple witching is the third Friday of March, June, September, and December, when stock index futures, stock index options, and stock options expire together. As a derivatives trader, you should watch these dates for potential volume and volatility increases.