What is Triple Witching

Stock Market History

What is Triple Witching

 

If you are new to trading, there are things you will hear of in your first few months. Undoubtedly one of those is triple witching. It is shrouded in mystery and mystique with many wild theories regarding how the markets will, or should, behave during triple witching week. Much of this is nonsense, but it can be a very volatile time of the quarter. Let’s take a look at it and dispel some of the witchy aesthetic surrounding the event.

What is Triple Witching? On a basic level, triple witching is the week when stock options, stock index futures, and stock index options all expire on the same day. It happens four times a year on the third Friday of March, June, September, and December. We will examine this in more detail because if you are newer to trading, that definition might not mean very much to you. In fact, when single stock futures debuted in 2022, the term quad witching is also a thing. But it is less common. However, there is one reason that traders find interest in triple witching weeks leading up to the last trading hour in the week…volatility.

But let’s back up.

What’s the deal with witchiness?

Times of the night, or even certain phases of the moon, that have long been associated with the notion that evil things occur have traditionally been called the “witching hour,” or “the witching moon,” or the like. These times have been considered dark in that odd things can happen that are out of the norm.

The last trading hour on a triple witching day is often called the “witching hour” because very often there are strange things afoot during this time…Specifically speaking, massive volatility. So what causes this uptick in volatility as these three types of financial instruments expire.

Stock options have many different expiration dates these days as the offerings have exploded as options trading has evolved and grown over the recent years. However, the third Friday of the month has traditionally been called “options expiration” or “Op-Ex” in common parlance. Though there are many expiration options, when traditionally minded traders say they have bought stock options contracts for December, as an example, those contracts are dated for the third week of the month. As this is still a heavily practiced tradition, there tends to be huge numbers of expiring options on OP-EX each month. As these contracts are exercised, it facilitates big volume of buying and selling in the underlying stocks, and this very often culminates in big volume as market makers buy the shares needed as contracts are exercised. And in the options contracts themselves can see massive volatility as the majority of contract holders seek to close out their contracts before expiration. This can lead to volume and volatility in the days leading up to OP-EX.

Stock index futures and Stock index options similarly expire on the third week of March, June, September, and December. As these instruments are different and complex in their own respective ways, suffice it to say that it is the expiration of these three types of instruments at the same time on the same day that causes all the fuss. With these three expirations all happening simultaneously, it creates massive buying and selling. Volume and volatility are sometimes difficult to believe. And, as a result, it has gained the mystique and mystery of the name “triple witching.”

It is not a time for new traders to jump into the fray. Seasoned traders can play the massive volatility of the witch both ways to huge profits. Lesser experienced traders might be better served avoiding the witch because…more often than not…something wicked their way comes.

And, as it is, this week is triple witching. And Friday from three to four pm is the witching hour.

Be safe out there.