Triple Witching Definition
Contents
What Is Triple Witching?
Triple witching is the simultaneous expiration of inventory choices, inventory index futures, and inventory index choices contracts all on the identical buying and selling day. This occurs 4 occasions a yr: on the third Friday of March, June, September, and December. A typical expiration date for the three sorts of equities derivatives could cause elevated buying and selling quantity and weird value motion within the underlying property.
Key Takeaways
- Triple witching is the expiration on the identical day of inventory choices, inventory index futures, and inventory index choices contracts.
- Triple witching happens quarterly—on the third Friday of March, June, September, and December.
- Triple witching days can see elevated buying and selling exercise as merchants shut, roll out, or offset their expiring positions, significantly within the last hour of buying and selling.
Understanding Triple Witching
Triple witching days generate buying and selling exercise and volatility as a result of contracts which might be allowed to run out might necessitate the acquisition or sale of the underlying safety. Whereas some spinoff contracts are opened with the intention of shopping for or promoting the underlying safety, merchants searching for spinoff publicity solely should shut, roll out, or offset their open positions previous to the shut of buying and selling on triple witching days.
Triple witching days, significantly the ultimate hour of buying and selling previous the closing bell, generally known as the triple witching hour, may end up in escalated buying and selling exercise and volatility as merchants shut, roll out, or offset their expiring positions.
Single inventory futures, final traded within the U.S. in 2020, had been typically grouped with inventory choices, index choices, and index futures, giving rise to the time period “quadruple witching.” However they by no means drew practically as a lot capital or buying and selling curiosity as the opposite sorts of equities derivatives, most notably inventory choices.
Offsetting Futures Positions
A futures contract, which is an settlement to purchase or promote an underlying safety at a predetermined value on a specified day, mandates that the agreed-upon transaction happen after the expiration of the contract. For instance, one E-mini S&P 500 futures contract is valued at 50 occasions the worth of the index. If the S&P 500 is at 4,000 at expiration, the worth of the contract is $200,000, which is the quantity the contract proprietor is obligated to pay if the contract is allowed to run out.
To keep away from this obligation, the contract proprietor closes the contract by promoting it previous to expiration. After closing the expiring contract, publicity to the S&P 500 index may be maintained by buying a brand new contract in a ahead month. That is known as rolling out a contract. A lot of the motion surrounding futures and choices on triple witching days are targeted on offsetting, closing, or rolling out positions.
On the expiration date, contract homeowners can select to not take supply and as an alternative shut their contracts by reserving an offsetting commerce on the prevailing value, settling the achieve or loss from the acquisition and sale costs. Merchants may lengthen the contract by offsetting the prevailing commerce and concurrently reserving a brand new possibility or futures contract to be settled sooner or later—a course of known as rolling the contracts ahead.
Expiring Choices
Choices which might be within the cash (ITM) current an identical state of affairs for holders of expiring contracts. For instance, the vendor of a coated name possibility can have the underlying shares known as away if the share value closes above the strike value of the expiring possibility.
On this state of affairs, the choice vendor has the choice to shut the place previous to expiration to proceed holding the shares or enable the choice to run out and have the shares known as away.
Name choices expire within the cash and are worthwhile when the value of the underlying safety is larger than the strike value within the contract. Put choices are within the cash when the inventory or index is priced under the strike value. In each conditions, the expiration of in-the-money choices ends in automated transactions between the patrons and sellers of the contracts. Consequently, triple witching dates result in an elevated quantity of those transactions being accomplished.
Triple Witching and Arbitrage
Although a lot of the buying and selling in closing, opening, and offsetting futures and choices contracts throughout triple witching days is expounded to the squaring of positions, the surge of exercise may drive value inefficiencies, which attracts short-term arbitrageurs.
These alternatives are sometimes the catalysts for heavy quantity going into the shut on triple witching days as merchants try to revenue on small value imbalances with massive round-trip trades which may be accomplished in seconds.
Regardless of the general enhance in buying and selling quantity, triple witching days don’t essentially result in heavy volatility.
Actual-World Instance of Triple Witching
Friday, March 15, 2019, was the primary triple witching day of 2019. Buying and selling quantity main as much as this third Friday of the month noticed elevated market exercise. In keeping with a Reuters report, buying and selling quantity on March 15, 2019, on U.S. market exchanges was “10.8 billion shares, in comparison with the 7.5 billion common” over the previous 20 buying and selling days.
For the week main into triple witching Friday, the S&P 500 was up 2.9% whereas the Nasdaq was up 3.8%, and the Dow Jones Industrial Common (DJIA) was up 1.6%. Nonetheless, it seems a lot of the beneficial properties occurred earlier than triple witching Friday as a result of the S&P was solely up by 0.50% whereas the Dow was solely up 0.54% Friday.
What Is Witching and Why Is It Triple?
In folklore, the witching hour is a supernatural time of day when evil issues could also be afoot. In derivatives buying and selling, this has colloquially utilized to the hour of contract expiration, typically on a Friday on the shut of buying and selling. On triple witching, three various kinds of contracts expire concurrently: listed index choices, single-stock choices, and index futures.
When Does Triple Witching Happen?
Triple witching normally happens on the third Friday of March, June, September, and December, at market shut (4:00 p.m. EST).
Why Do Merchants Care About Triple Witching?
As a result of a number of derivatives expire on the similar second, merchants will typically search to shut out all of their open positions upfront of expiration. This could result in elevated buying and selling quantity and intraday volatility. Merchants with massive quick gamma positions are significantly uncovered to cost actions main as much as expiration. Arbitrageurs attempt to reap the benefits of such irregular value motion, however doing so can be fairly dangerous.
What Are Some Worth Abnormalities Noticed on Triple Witching?
As a result of merchants will attempt to shut or roll over their positions, buying and selling quantity is normally above common on triple witching, which may result in larger volatility. Nonetheless, one attention-grabbing phenomenon noticed is that the value of a safety might artificially have a tendency towards a strike value with massive open curiosity as gamma hedging takes place.
This could lead the value to “pin” the strike at expiration as a result of this form of buying and selling exercise. Pinning a strike imposes pin danger for choices merchants, whereby they grow to be unsure as as to whether or not they need to train their lengthy choices which have expired within the cash or very near it. It’s because, on the similar time, they’re not sure as to what number of of their related quick positions they are going to be assigned.
