What is Triple Witching?
265 reads · Last updated: December 5, 2024
Triple witching is the simultaneous expiration of stock options, stock index futures, and stock index options contracts all on the same trading day. This happens four times a year: on the third Friday of March, June, September, and December. A common expiration date for the three types of equities derivatives can cause increased trading volume and unusual price action in the underlying assets.
Definition
Triple Witching refers to the simultaneous expiration of stock options, stock index futures, and stock index options on the same trading day. This occurs four times a year, on the third Friday of March, June, September, and December. The simultaneous expiration of these three types of equity derivatives can lead to increased trading volume and unusual price movements in the underlying assets.
Origin
The concept of Triple Witching originated from the trading of derivatives in financial markets, evolving with the development of options and futures markets. The earliest options and futures markets became active in the 1970s and 1980s, and as these markets matured, the phenomenon of Triple Witching gained attention from investors.
Categories and Features
Triple Witching involves three main types of financial derivatives: stock options, stock index futures, and stock index options. Stock options allow investors to buy or sell stocks at a specific price on a future date. Stock index futures are futures contracts based on stock indices, allowing investors to speculate or hedge against future index levels. Stock index options are options contracts based on stock indices. The simultaneous expiration of these derivatives can lead to increased market volatility as investors adjust their positions before the expiration date.
Case Studies
A typical case is the Triple Witching in March 2020, when the market was already highly volatile due to the COVID-19 pandemic. The arrival of Triple Witching exacerbated market volatility, leading to a significant increase in trading volume for the S&P 500 index on the expiration day. Another case is the Triple Witching in December 2018, when market expectations of Federal Reserve interest rate hikes led investors to adjust their positions before expiration, resulting in notable price fluctuations on the expiration day.
Common Issues
Investors often worry about abnormal market volatility during Triple Witching. A common misconception is that Triple Witching will inevitably lead to a market crash. In reality, while market volatility may increase, it does not necessarily lead to a crash. Investors should pay attention to changes in market liquidity and trading volume to better manage risks.
