What Is Triple Witching?

The world of finance is filled with colourful jargon, and "triple witching" is no exception. While it might sound like something out of a Harry Potter novel, it's actually a significant event in the stock market that occurs four times a year. Triple witching can bring a surge in trading activity and volatility, making it a time of both opportunity and caution.

At its core, Triple Witching is the quarterly event when three different types of financial derivatives contracts—stock options, stock index futures, and stock index options—all expire on the same day.

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.

So, What Exactly is Triple Witching?

Triple witching is the simultaneous expiration of three types of derivatives contracts on the third Friday of March, June, September, and December:

1. Stock Index Futures: Stock index futures contracts, such as those based on popular indices like the S&P 500 or Nasdaq, also expire on triple witching. These futures contracts are often used for hedging and speculative purposes, which means many market participants close or roll these positions on (or before) triple witching.
2. Stock Index Options: In addition to regular stock options, stock index options contracts, which are options based on broader market indices like the S&P 500, also typically expire on triple witching. That means investors and traders holding these positions must also decide whether to close or roll their positions on triple witching.
3. Stock Options: On triple witching, regular monthly stock options contracts that are listed on individual stocks or exchange-traded funds (ETFs) typically expire. Traders and investors who hold these options positions must decide whether to exercise them, roll them over, or let them expire.

When these three types of contracts expire simultaneously, it creates a flurry of trading activity as investors close out existing positions, roll over contracts, or establish new ones. This surge in volume can lead to increased volatility, making the market prone to sharp price swings.

How Triple Witching is Different from Quadruple Witching

• Quadruple witching refers to the simultaneous expiration of stock index futures, stock index options, stock options, and single stock futures derivatives contracts four times a year.
• Quadruple witching has given way to triple witching since single stock futures stopped trading in the U.S. in 2020
• Bottomline, Triple Witching is all what you might want to care about.

When Does Triple Witching Occur?

Triple witching isn't a random occurrence; it follows a set schedule that traders can anticipate and plan for. Knowing these dates can be crucial for managing risk and identifying potential trading opportunities.

The Third Friday is Key

Triple witching consistently falls on the third Friday of the last month of each quarter:

• March
• June
• September
• December

This means you can expect four triple witching days every year. 

For example, in 2024, the triple witching dates are:

• 15 March 2024
• 21 June 2024
• 20 Sept. 2024
• 20 Dec. 2024

For 2025, the dates are:

• 21 March 2025
• 20 June 2025
• 19 Sept. 2025
• 19 Dec. 2025

And for 2026, the triple witching days are:

• 20 March 2026
• 19 June 2026
• 18 Sept. 2026
• 18 Dec. 2026

It's worth noting that in some years, there might be slight variations due to holidays or other market events. However, the third Friday pattern generally holds true.

How Does Triple Witching Impact the Stock Market?

A Surge in Trading Volume

As triple witching day approaches, trading volume typically starts to increase. This is due to a number of factors:

• Closing Out Positions: Traders with expiring contracts need to decide whether to close out their positions, roll them over to the next expiration cycle, or exercise them. This decision-making process often leads to a flurry of buying and selling activity.
• Hedging: Some investors use options and futures contracts to hedge their portfolios against potential losses. As expiration approaches, they might adjust their hedges, leading to additional trading.
• Speculation: Triple witching can create short-term price fluctuations, attracting speculators who try to profit from the volatility. This speculation can further fuel trading volume.

The increase in volume tends to peak on the actual triple witching day, particularly in the last hour of trading, often referred to as the "witching hour." This is when traders scramble to finalize their positions before the contracts expire. In fact, studies have shown that trading volume on triple witching days can be as much as double the average daily volume.

Increased Volatility: A Double-Edged Sword

The surge in trading volume often translates into heightened volatility. Price swings can become more pronounced, and the market can experience sudden shifts in direction. This volatility can create both opportunities and risks for traders:

• Opportunities: For nimble traders who can accurately anticipate market movements, triple witching can present opportunities for quick profits. Strategies like straddles and strangles, which profit from volatility, can be particularly effective.
• Risks: The unpredictable nature of triple witching volatility can also lead to significant losses. If a trade goes against you, the rapid price swings can quickly erode your capital.

What Are Some Real-World Examples of Triple Witching

The history of the stock market is filled with dramatic events, and triple witching days have certainly contributed their fair share of excitement. Analysing past occurrences can provide valuable insights into how these events unfold and what lessons traders can glean for the future.

The Dot-Com Crash of March 2000

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. On this fateful day, the index plummeted 5%, erasing over $175 billion in market value. This event marked a turning point, as the tech bubble began to deflate, leading to a prolonged bear market.

The Financial Crisis of June 2007

On June 15, 2007, as the financial crisis was brewing beneath the surface, triple witching added fuel to the fire. The Dow Jones Industrial Average suffered a 311-point drop, its worst performance in months. This event foreshadowed the turmoil that would soon engulf the global financial system.

The COVID-19 Volatility of September 2020

The triple witching day of September 18, 2020, occurred in the midst of the COVID-19 pandemic, a time of extreme uncertainty and market volatility. The S&P 500 experienced a wild ride, initially surging over 1% before reversing course and closing down 0.5%. This dramatic intraday swing demonstrated the heightened sensitivity of the market during times of crisis.

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.

What are Some Triple Witching Trading Strategies?

Navigating the volatility of triple witching requires a strategic approach. While there's no one-size-fits-all strategy, several popular options trading tactics can be employed to potentially capitalize on the market fluctuations or to protect your portfolio.

Disclaimer: Options trading involves significant risk and is not suitable for all investors. Consult with a financial advisor before making any investment decisions.

Volatility-Based Strategies

Given the increased volatility during triple witching, strategies that benefit from large price movements are often favoured.

• Long Straddle: This strategy involves buying both a call option and a put option on the same underlying security with the same strike price and expiration date. This allows you to profit whether the stock price moves significantly up or down.
• Long Strangle: Similar to a straddle, but you buy call and put options with different strike prices (one above and one below the current market price). This strategy is less expensive than a straddle but requires a larger price move to be profitable.
• Condors and Butterfly Spread: This involves buying one call option at a lower strike price, selling two call options at a middle strike price, and buying one call option at a higher strike price. It profits from a relatively stable market but can be adjusted for volatility.

Other Strategies

While volatility-based strategies are popular, other approaches can also be effective during triple witching:

• Calendar Spreads: This involves buying and selling options contracts with different expiration dates on the same underlying security. This can be used to profit from time decay or to take advantage of volatility shifts.
• Protective Puts: If you're concerned about downside risk, buying put options can act as insurance for your portfolio, limiting potential losses if the market drops.
• Covered Calls: Selling call options against shares you already own can generate income and reduce the cost basis of your holdings. However, it limits your upside potential if the stock price rises significantly.

Risk Management is Key

Regardless of the strategy you choose, risk management is crucial during triple witching. Consider these tips:

• Define Your Risk Tolerance: Determine how much risk you're willing to take before entering any trade.
• Use Stop-Loss Orders: Set stop-loss orders to automatically exit a trade if it moves against you by a certain amount.
• Diversify Your Portfolio: Don't put all your eggs in one basket. Spread your risk across different asset classes and strategies.
• Don't Overtrade: Avoid the temptation to overtrade during volatile periods. Stick to your plan and avoid impulsive decisions.
• Consult with an Expert: If you're unsure about a particular strategy or how to manage risk, seek advice from a financial professional.

OptionPundit's Role in Your Strategy

A solid options edcuation can be an invaluable resource when developing and executing your triple witching trading strategies. Our programs provide skill, strategies and trading systems to help you make informed decisions. Whether you're exploring different strategies, analysing potential risks, or tracking market movements, OptionPundit has you covered.

How to Deal with Triple Witching Days

If you are looking for ways to deal with it, here's a roadmap to prepare for Triple Witching days. 

1. Stay Informed

• Mark the Calendar: Be aware of when Triple Witching days occur — the third Friday of March, June, September, and December. (Next 3 dates are: June 21, 2024, September 20, 2024 and December 20, 2024)

  By simply being aware of these dates, you can anticipate potential market volatility.

• Understand the Mechanics: Familiarize yourself with the basics of Triple Witching — the simultaneous expiration of stock options, stock index options, and stock market index futures. Knowing what's happening can demystify the day's events. 

2. Review Your Portfolio

• Check Expirations: If you hold options or futures in your portfolio, check their expiration dates. If they're set to expire on a Triple Witching day, consider your next steps — whether to roll them over, exercise them, or let them expire.

• Reassess Hedging Strategies: If you use derivatives as a hedging tool, Triple Witching can be an opportune time to reassess your hedging needs and adjust your positions accordingly.

3. Avoid Knee-Jerk Reactions

• Stick to Your Strategy: While Triple Witching can lead to short-term market fluctuations, it's essential to stick to your long-term investment strategy. Avoid making impulsive decisions based solely on the day's events.

• Differentiate Between Noise and News: Recognize that much of the price movement on Triple Witching days might be due to the mechanics of contract expirations rather than fundamental changes in stock or index values.

4. Consider Liquidity Needs

• Anticipate Potential Liquidity Issues: While Triple Witching often leads to increased trading volume, certain stocks or sectors might experience reduced liquidity. If you plan to make significant trades, be aware of potential liquidity constraints and review average trading volume for your underlying stock holdings.

• Limit Orders Over Market Orders: Given the potential for price swings, consider using limit orders (which specify a price limit) over market orders (which execute at the current market price) to have better control over execution prices. If you are an OptionPundit student, you know we don't use market orders except only in specific situations.

 5. Stay Updated on Broader Market News

• Monitor Other Influences: Triple Witching can sometimes coincide with other market-moving events, like economic data releases or geopolitical news. Stay updated on broader market events to understand the full context of market movements. You might want to keep a check on Economic calendar (provided for FREE by Econoday).

 6. Seek Expert Advice

• Consult with Financial Advisors: If you're unsure about how Triple Witching might affect your portfolio or investment strategy, consider consulting with a financial advisor or investment professional. They can provide tailored advice and insights. If you are an OptionPundit community member, you can always seek out help from trading buddies or mentors.

Additional Questions About Triple Witching

Triple Witching can be complex and you might feel nervous or panicked about the event. Here, we'll tackle some frequently asked questions and clear up common misconceptions to deepen your understanding of this market phenomenon.

<pQ: Is triple witching always bad for the market?

A: Not necessarily. While triple witching often leads to increased volatility, this doesn't automatically mean the market will decline. Volatility can create opportunities for profit, and the market can just as easily surge upwards as it can fall.

Q: Can individual investors trade during triple witching?

A: Absolutely! However, it's important to be aware of the heightened risks and exercise caution. Consider utilizing strategies like covered calls or protective puts to manage your exposure, and always do your research before making any trades.

Q: Are there any specific stocks that are more affected by triple witching?

A: Stocks with a high number of expiring options contracts tend to be more susceptible to volatility during triple witching. This often includes heavily traded stocks, those in the news, or stocks with upcoming events like earnings announcements.

Q: How can I stay informed about triple witching events?

A: OptionPundit offers a wealth of resources to help you stay informed, including:

• Market News and Analysis: Our Money Monday Live Streaming show provides up-to-date news, analysis, and commentary on triple witching and other market events.
• Expiration Calendars: Stay ahead of the game with our integrated calendar that highlights upcoming triple witching dates and other important market events.
• Educational Resources: Expand your knowledge through our articles, tutorials, and webinars on options trading and triple witching strategies.

Q: Is there anything else I should know about triple witching?

A: While triple witching is a significant event, it's just one piece of the puzzle. Remember to consider other factors like overall market conditions, economic data releases, and company-specific news when making trading decisions.

In Conclusion

Triple Witching days, with their unique blend of volatility and opportunity, underscore the dynamic nature of financial markets. For investors and options traders, preparation is key. 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.

Remember, in the world of investing, knowledge and preparation are your most potent allies.

Happy Trading,

Manoj Kumar