What is Triple Witching?

Triple witching is the expiration of three different types of futures and options on the same day. This happens quarterly on the third Friday of the months of March, June, September and December. It can be a remarkably busy time for the securities markets, as traders close, roll out or offset expiring positions in the frantic hour before market closing.

This phenomenon occurs because all three types of contracts, previously listed, reach expiration in the same hour. The three types of contracts are stock options, stock index futures and stock index options. Stock options are contracts that give traders the right to purchase or sell a stock at a certain price at a given point in time. Stock index futures are contracts based on an underlying index of stocks and that provide investors with a method of speculation or hedging. An example of a stock index Futures contract is the S&P 500 which is based on the 500 largest U.S. companies. Finally, stock index options contracts give traders the right to buy or sell a specific index on or before a given date at a predetermined price.

The activity that takes place on a triple witching day may often leave traders feeling overwhelmed, especially with their positions close to expiration. These traders will have to scramble to close, roll out, or offset their expiring positions, before markets close at the end of the day. This may often result in a flurry of activity, particularly during the final hour, as traders rush to complete these final transactions. Traders who hold positions close to expiration may also see their positions suffer from quick swings in prices which may be caused by the heightened trading volume of a triple witching day.

On the other hand, increased trading activity often leads to increased liquidity as well. This increased liquidity means that it will be easier for traders to enter a trade, as there will be more buyers and sellers in the market. These traders may also take advantage of the increased volume to enter other positions around the expiring contracts. Therefore, while there are risks posed by triple witching, it also presents opportunities to traders where there is the potential for profits.

For the most part, Triple Witching is an important event to understand for active traders, as the markets can become exceptionally busy. Traders who have an understanding of this phenomenon will be better prepared to manage the risks and take advantage of the opportunities that come about due to the increased trading activity around triple witching days.