Triple Witching: Definition & 2022 Dates

what is triple witching

There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. If you have a trading strategy and want to test it to see how it performs but you’re not sure where to start, or you don’t have the skill set to get it all set up efficiently on your own. At Tradinformed we are committed to helping you become a better trader. Stay ahead of the competition and see how much better your trading can be. Learn how to avoid the dangers and maximize the opportunities around Triple Witching.

what is triple witching

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. There have been quadruple witching days when single stock futures expired on a triple witching day. Triple witching does not directly move the market higher or lower, all it does is temporarily increase trading volume and liquidity. The increased volume and price fluctuations triggered by triple witching cause traders to take action on the underlying assets.

Are There Strategies Traders Can Use For Triple-Witching Dates?

Writers and holders of futures and options contracts must exit their positions to avoid stock assignment if their position is in-the-money. Investors may also choose to exercise their contracts or accept assignment. A stock index option gives its holder the right, but not the obligation, to buy or sell a contract that represents the value of an underlying index on a specified date and at a specified price.

what is triple witching

Durations of available options contracts varies, sometimes with expiries a few years into the future, however options with nearer-term expiries tend to have better liquidity. One stock option contract represents 100 shares of the underlying company, so an option quoted at $3.25 would cost the $325. Triple-witching days generate more trading activity and volatility since contracts allowed to expire cause buying or selling of the underlying security. Triple witching day is often accompanied by increased volatility and trading volume because traders and institutional investors must close or roll their expiring futures and options positions to the next contract expiration. Triple witching refers to the third Friday of March, June, September, and December when three kinds of securities—stock market index futures, stock market index options, and stock options—expire on the same day. Derivatives traders pay close attention on these dates, given the potential for increased volume and volatility in the markets.

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.

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.

Expiring Options

In this situation, the option seller can close the position before expiration to continue holding the shares or let the option expire and have the shares called away. On the expiration date, contract owners can decide not to take delivery and instead close their contracts by booking an offsetting trade at the prevailing price, settling the gain or loss from the purchase and sale prices. The last hour of trading can be especially volatile as investors scramble to exit positions before the market closes. Although the name sounds ominous, triple witching day has nothing to do with Halloween or scary stories. Triple witching is simply the term given to four unique trading days each year.

  1. In this situation, the option seller can close the position before expiration to continue holding the shares or let the option expire and have the shares called away.
  2. Call options expire in the money, that is, profitable when the underlying security price is higher than the strike price in the contract.
  3. 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.
  4. You will see that avoiding triple witching has improved performance compared to buy and hold.
  5. 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.

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 https://www.day-trading.info/ 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.

Get More Winning Trades

Long-only traders and active investors can avoid triple witching by going to cash in all or part of their portfolio around the time of triple witching. Many traders are nervous about triple witching, but with the information in this article, you will be able to minimize your risk and increase your profits. U.S.-style put and call options give their buyer the right to buy or sell the underlying at any time up to the expiration date. European-style put and call options give their buyer the right to buy or sell the underlying only on the expiration date. Triple witching is the third Friday of March, June, September, and December. Normal monthly and weekly options expiration still occurs on these dates.

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.

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 https://www.topforexnews.org/ 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.

This brings in arbitrageurs who use high-frequency trading to try to take advantage. Options that are in the money are similar for those holding expiring contracts. For example, the seller of a covered call option can have the underlying shares called away if the share price closes above the strike price of the expiring option.

What Are Triple Witching Days?

Tradinformed backtest models are an easy-to-use format that allows you to backtest your trading strategies using past market data and technical indicators. This increase in trading activity can cause temporary distortions in price. He founded the website in 2013, showing traders how to calculate technical indicators. Since https://www.forexbox.info/ then, Tradinformed has developed a range of easy-to-use Excel backtesting tools to help traders take control of their trading and achieve success. This will help you learn how to backtest trading strategies and make informed trading decisions while providing you with the tools you need to develop your own trading systems.

Triple Witching tends to have above-average market volume and volatility – in particular during the last hour of Friday trading. These opportunities might be catalysts for heavy volume going into the close on triple-witching days as traders look to profit on small price imbalances with large round-trip trades completed in seconds. For example, in 2021, S&P 500’s average daily volume was 2.1 million.

On triple witching days, during the last hour of trading before the closing bell, there can be increased trading as individual and large institutional traders close their positions, roll out, or offset their expiring positions. Four times a year, contracts for stock options, stock index options, and stock index futures all expire on the same day, resulting in much higher volumes and price volatility. The stock market may seem foreign and complicated to many people, and “triple witching days” is one of those concepts that may seem overly sophisticated, when in fact it’s quite simple.

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