Triple Witching
Contents
Unlocking the Mysteries of Triple Witching in Financial Markets
Deciphering the Phenomenon of Triple Witching
Triple witching, a term often used in financial markets, refers to the simultaneous expiration of three different types of contracts—stock options, stock index futures, and stock index options—on the same trading day. This intriguing phenomenon occurs quarterly on the third Friday of March, June, September, and December, stirring up increased trading activity and volatility in the markets.
Understanding Triple Witching
Triple witching days prompt heightened trading activity and volatility as traders rush to close, roll out, or offset their expiring positions before the closing bell. These days, particularly the final hour of trading, known as the triple witching hour, witness a surge in trading volume and unusual price action as market participants navigate expiring contracts across various asset classes.
Offsetting Futures Positions
During triple witching days, much of the trading action revolves around offsetting futures positions. Futures contracts obligate the contract owner to buy or sell the underlying security at a predetermined price on a specified date. To avoid this obligation, contract owners close their positions before expiration, often by selling the contract and rolling out to a new contract in a forward month.
Expiring Options
Options that are in the money present a similar scenario for holders of expiring contracts. With call options expiring in the money when the price of the underlying security exceeds the strike price and put options expiring in the money when the price falls below the strike price, triple witching dates witness a flurry of transactions as buyers and sellers navigate expiring contracts.
Triple Witching and Arbitrage
While triple witching days are marked by increased trading volume and volatility, they also present arbitrage opportunities for astute traders. Price inefficiencies resulting from heightened activity can attract short-term arbitrageurs seeking to profit on small price imbalances through rapid round-trip trades.
Real-World Example of Triple Witching
The significance of triple witching in financial markets is exemplified by real-world occurrences. For instance, on March 15, 2019, trading volume surged as markets braced for the first triple witching day of the year, underscoring the impact of expiring contracts on market dynamics.
Frequently Asked Questions
What Is Witching and Why Is It Triple?
When Does Triple Witching Occur?
Why Do Traders Care About Triple Witching?
What Are Some Price Abnormalities Observed on Triple Witching?