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Triple Witching: Definition and Impact on Trading in Final Hour

what is triple witching

As options and futures contracts expire, investors must close or offset their position or roll out existing positions to a future expiration date. The position management amplifies volume, specifically at the end of the trading session Friday afternoon. While an options contract may or may not be exercised by the owner, a futures contract carries definitive obligations to carry out the agreed terms. The buyer of a futures contract must pay the contracted price on the expiry date, and the seller of the futures contract must deliver the contracted asset for the established price.

SPX’s daily range expanded nearly 7% on triple witching days, and the average percentage return was -0.72% lower than the daily average. This date is when quarterly stock options, stock index options and stock index futures expire at the same time. Single stock futures began trading in November 2002 and each contract represented 100 shares of stock. Single stock futures were legal agreements to buy or sell an underlying stock at a specified price at a specified future date.

An Example of Triple Witching

An index option can have an index futures contract as its underlying asset. Trading volume leading up to this third Friday of the month had increased market activity. Trading volume March 15, 2019, on U.S. market exchanges was 10.8 billion shares, compared with an average of 7.5 billion average the previous 20 trading days. Triple witching is the quarterly event when the calendar aligns for all the prominent futures and options contracts to expire on the same day. Investors should understand what happens on triple witching days and be prepared for the greater volume and price volatility that comes with these days.

The results show that the strategy has been profitable 60% of the time. I like that this strategy has a high Profit Factor which tells us that winning trades tend to be larger than losing trades. The intention is to have a tradable strategy with lower drawdown and a higher MAR ratio than the underlying instrument. You can compare the net profit, compound annual growth rate (CAGR), max drawdown and MAR ratio. You will see that avoiding triple witching has improved performance compared to buy and hold. I do all my analysis in Excel and you can see the results of each trading strategy compared to the underlying instrument.

Triple Witching is a market phenomenon that happens four times every year. For the week leading into the triple-witching Friday, the S&P 500, Nasdaq, and the Dow Jones Industrial Average (DJIA) were up 2.9%, 3.8%, and 1.6%, respectively. However, it seems much of the gains happened before the triple-witching Friday because the S&P 500 and DJIA increased only 0.50% and 0.54%, respectively, that day. This website is using a security service to protect itself from online attacks.

  1. Because multiple derivatives (futures and options) are connected to a similar underlying asset class, volume spikes and the above-average trading volume can create unpredictable price action.
  2. One stock option contract represents 100 shares of the underlying company, so an option quoted at $3.25 would cost the $325.
  3. I am continually working on developing new trading strategies and improving my existing strategies.
  4. Besides triple witching days, there are also double witching days which occur when two classes of options on the same underlying securities expire on the same day.

Much of the action surrounding futures and options on triple-witching days is focused on offsetting, closing, or rolling out positions. One strategy is to look for arbitrage opportunities from price discrepancies between the stock market and derivative markets. Also, some traders might take up a straddle strategy, holding both a put and a call option with the same strike price and expiration date, to try to profit from large price swings in either direction. However, these strategies have risks and are not recommended for less experienced traders. Call options expire in the money, that is, profitable when the underlying security price is higher than the strike price in the contract. Put options are in the money when the stock or index is priced below the strike price.

Do You Want More Winning Trades?

Knowing that can go a long way toward preventing emotional responses to market movements. In September 2020, the market where single stock futures were traded, OneChicago, closed and single stock futures ceased trading. Options expiration day is always the third Friday of every month and is typically volatile. For example, one E-mini S&P 500 futures contract is valued at 50 times the value of the index. If the S&P 500 is at 4,000 at expiration, the value of the contract is $200,000, the amount the contract’s owner must pay if the contract expires. Despite the overall increase in trading volume, triple-witching days do not necessarily lead to high volatility.

Of course, most participants in the future markets will close their open positions prior to the delivery requirement. So if an investor (or firm) owns 3 March Futures contracts on the S&P 500, they may chose to sell 3 offsetting March Futures contracts on the S&P 500, while eliminated their obligations. 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.

A futures contract, an agreement to buy or sell an underlying security at a set price on a specified day, mandates that the transaction take place after the expiration of the contract. 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. Investors, particularly large financial institutions, often offset the new positions by buying or selling the underlying asset as a hedge, which further fuels the increased volume and volatility. In addition to above-average volume, traders can expect increased volatility.