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. The S&P 500 (SPY), Nasdaq 100 (QQQ) and Dow Jones (DIA) all closed under their previous day’s close, while the Russell 2000 (IWM) held over its previous day close. The odd behavior of these 3 indices on a triple witching day leads me to believe they might be the witches of today’s market. Investors may also choose to rollover their derivative contracts, which means closing out this particular contract that is about to expire and entering into a similar contract that expires at a later date. But the dance of triple witching doesn’t culminate with contract expirations.
Strategy: Seasonal Short Trade in AAPL
The fund completed a volume-supported V-shaped recovery pattern in June, returning to the prior high and adding another 12 points into June 10’s all-time high at $248. The fund has given up about 16 points and failed the breakout in the past three sessions, reinforcing resistance in the upper $230s. A test at that level during the next uptick could be instructive, with a buying spike reinstating the breakout, while a reversal would drive another nail into the rally coffin. Based on this research, we have developed trading strategies mentioned below, available to TradeMachine’s paid members.
What is Triple Witching?
On these days, we see the expiration of stock index futures, stock index options, and stock options. As these contracts come to a close, traders and investors might decide to close out, renew, or exercise their positions. Triple witching day occurs four times in a year when the expiration date of three types of derivatives coincides. Triple witching hour, typically, is referred to the last hour of trade on that day.
- Writers and holders of futures and options contracts must exit their positions to avoid stock assignment if their position is in-the-money.
- In both cases, if the contract owner or contract writer can pay for security to be delivered, the contract must be closed out before expiration.
- They need to navigate the increased activity, looking for good opportunities and trying to avoid potential pitfalls.
- The way they interact can lead to increased market activity and higher trading volumes.
- However, these strategies have risks and are not recommended for less experienced traders.
The intensified tumult during this period augments the emergence of such variances, proffering arbitrageurs with more chances. 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.
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. Besides the increased trading, the witching hour can also result in price inefficiencies and, hence, arbitrage opportunities. Because of the heavy volume of trades coming in quickly, traders seek to profit from even slight price imbalances. Writers and holders of futures and options contracts must exit their positions to avoid stock assignment if their position is in-the-money.
Potential Impact of Triple Witching on the Stock Market
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. The reversal is nearing the confluence of the 50- and 200-day EMAs as well as round number support at $300 and the .618 Fibonacci retracement level, raising the odds for a string bounce. However, the on-balance volume (OBV) accumulation-distribution indicator failed to keep up with bullish price action during the three-month bounce, stalling at the .618 retracement. This bearish divergence may signal that buying interest has dried up, raising the odds for additional downside. How an individual day trader chooses to handle triple witching will depend on their trading style, trading strategies, and level of trading experience. New traders will want to be more cautious in the days leading up to and on Triple Witching Friday.
Friday was triple witching day, meaning that stock options, stock index options and stock futures contracts were all due to expire. This happens four times a year and can lead to increased volume, as money is moved around resulting in sometimes unusual (or spooky) price action. Triple witching refers to the concurrent expiration of stock options, stock index futures, and stock index options. Such coinciding expirations can amplify trading volumes and market fluctuations.
The witching hour is the final hour of trading before the expiration of derivatives contracts. More often, traders will use terms such as “triple witching,” which is the expiration of stock options, index options, and index futures on the same day. This event occurs on the third Friday of March, June, September, and December. Triple witching does not include all of the stock index futures and options contracts, so even though they are the most talked-about expiration events, they are not the only expiration days.
Any references to quadruple witching are about the three types of contracts above expiring simultaneously. If a day trader opts to trade during these weeks, measures should be taken to ensure the strategy being used works in such an environment, or a new strategy can be constructed specifically for this week. Swing traders and investors are unlikely to be significantly affected by the event, but swing traders may wish to take note of any statistical biases present during the week of triple witching. Triple witching is the third Friday of March, June, September, and December. 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.
The phenomenon of triple witching has left an indelible mark on financial markets time and again. By delving into historical instances, we can glean insights into its potent influence on market turbulence. Parallelly, arbitrage scopes between stock index options and their component stocks beckon. Disparities between an index option’s valuation and the combined rates of its integral stocks can be capitalized upon by engaging with https://forexanalytics.info/ the undervalued facet and relinquishing the inflated one.
Triple witching hour
The terms “triple witching” and “quadruple witching” are often used to describe occasions on the third Friday of March, June, September, and December. For about 20 years, they had one difference, but since 2020, they have referred to the same event. Despite the overall increase in trading volume, triple-witching days do not necessarily lead to high volatility. 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.
Last Thursday marked the unofficial start of triple witching options expiration, with the rollover of June futures contracts into the September forward month at many brokers. The period from the rollover through this Friday’s expiration have a well-earned reputation for whipsaws and reversals, raising the potential for high volatility. The CBOE S&P 500 Volatility Index (VIX) is sounding this message loud and clear, with the “fear gauge” lifting to a two-month high above $40.
If you’re an investor or a trader, you have probably heard the term “Triple Witching” before. This term is used in the stock market to describe the expiration of three different financial instruments on the same day. Look for volatile, two-sided price action during this week’s triple witching options expiration, with the potential for major benchmarks to complete bearish reversal patterns. Triple witching underscores the intricate dance of key financial instruments, spotlighting both its benefits and challenges.
Price action cycle analytics for traders then eased into a triangular pattern at resistance, finally yielding an October breakout that booked impressive gains into the February 2020 high at $237. It’s worth noting that the pandemic did not help the market volatility either, so this tremendous fall in value is attributed to that as well. 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. Triple Witching occurs on the third Friday of March, June, September, and December.
While triple witching days may see some market volatility, not all trades occur in the last hour. Short-term traders should adapt their strategies to these conditions, avoid trading, or reduce their position size if they notice their performance deteriorates during this time. Triple witching is the synchronized expiration of stock index futures, stock index options, and stock options on the third Friday of March, June, September, and December. It’s pivotal for traders because the convergence of these expirations can heighten market volatility, amplify trading volumes, and present arbitrage opportunities. Every third Friday of March, June, September, and December, three financial instruments—stock index futures, stock index options, and stock options—expire at the same time.