A witching day on the market doesn't have anything to do with boiling cauldrons, flying broomsticks, or black cats, but it is a day when strange and often unpredictable things happen. In short, it's when several forces affecting the stock market, mostly having to do with stock options and index rebalances, all happen at once.
What is a Witching day in stock market?
For the last 15 years, the S&P 500 has had 59 witching events. Analysis of the chart shows that the index rallies around the 6th day before to the day before the witching. However, the trading during a witching day is more aggressive, and the market isn’t necessarily kind to beginners.
What is triple witching in stocks?
Triple witching occurs when the contracts for stock index futures, stock index options and stock options expire on the same day.
What stocks expire on Witching days?
So, on those days, stock index futures, stock index options, stock options contracts, and single stock futures all expire. The most recent quadruple witching day was June 19, and the next one will be on September 18. The next double witching day is July 17.
What are quadruple witching days in the stock market?
Quadruple witching days occur four times every year, on the third Friday during the months of March, June, September, and December. So, on those days, stock index futures, stock index options, stock options contracts, and single stock futures all expire.
What happens on triple witching day?
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. This last hour is called the triple witching hour.
Is triple witching bullish or bearish?
We have found that based on historical data, triple witching expiration weeks can bring unique trading opportunities. Gathering data over the last ten years, we were able to conclude that triple witching expiration week was very bullish and that the week after expiration was very bearish.
What witching means?
: the practice of witchcraft : sorcery. witching. adjective. Definition of witching (Entry 2 of 2) : of, relating to, or suitable for sorcery or supernatural occurrences the very witching time of night— William Shakespeare.
How does triple witching affect stock prices?
Triple witching occurs quarterly—on the third Friday of March, June, September, and December. Triple witching days, particularly in the final hour of trading preceding the closing bell—called the triple witching hour—can see increased trading activity as traders close, roll out, or offset their expiring positions.
What Is Triple Witching?
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.
Understanding Triple Witching
Triple witching days generate trading activity and volatility because contracts that are allowed to expire may necessitate the purchase or sale of the underlying security.
Offsetting Futures Positions
A futures contract, which is an agreement to buy or sell an underlying security at a predetermined price on a specified day, mandates that the agreed-upon transaction take place after the expiration of the contract. For example, one futures contract on the Standard & Poor’s 500 Index (S&P 500) is valued at 250 times the value of the index.
Expiring Options
Options that are in the money (ITM) present a similar situation for holders of 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.
Triple Witching and Arbitrage
Though much of the trading in closing, opening, and offsetting futures and options contracts during triple witching days is related to the squaring of positions, the surge of activity can also drive price inefficiencies, which draws short-term arbitrageurs .
Real-World Example of Triple Witching
Friday, March 15, 2019, was the first triple witching day of 2019. Trading volume leading up to this third Friday of the month saw increased market activity. According to a Reuters report, trading volume on March 15, 2019, on U.S. market exchanges was "10.8 billion shares, compared to the 7.5 billion average" over the past 20 trading days. 4
Frequently Asked Questions
In folklore, the witching hour is a supernatural time of day when evil things may be afoot. In derivatives trading, this has colloquially applied to the hour of contract expiration, often on a Friday at the close of trading.
What Is Quadruple Witching?
Quadruple witching refers to a date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. While stock options contracts and index options expire on the third Friday of every month, all four asset classes expire simultaneously on the third Friday of March, June, September, and December.
Understanding Quadruple Witching
Quadruple witching is similar to the triple witching dates, when three out of the four markets expire at the same time, or double witching, in which two markets out of the four markets expire simultaneously.
Types of Contracts Involved in Quadruple Witching
Here are the four classes of contracts involved in quadruple witching.
Market Impact of Quadruple Witching
Quadruple witching days witness heavy trading volume. One of the primary reasons for the increased activity is the options and futures contracts that are profitable settle automatically with offsetting trades.
Closing and Rolling Out Futures Contracts
Much of the action surrounding futures and options on quadruple witching days are focused on offsetting, closing, or rolling out positions. A futures contract contains an agreement between the buyer and the seller in which the underlying security is to be delivered to the buyer at the contract price at expiration.
Arbitrage Opportunities
Over the course of a quadruple witching day, transactions involving large blocks of contracts can create price movements that may provide arbitrageurs the opportunity to profit on temporary price distortions.
Real-World Example of Quadruple Witching
Friday, March 15, 2019, was the first quadruple witching day of 2019. The frenzy leading up to Friday during that week led to increased market activity.
What Is the Importance of Quadruple Witching Dates?
Quadruple witching dates are of utmost importance to traders and investors as these dates are usually the most heavily traded days of the year. The reason for this is because people are exercising their futures and options before they expire. Because of this, there tends to be greater market volatility on quadruple witching days.
Quadruple Witching in the Stock Market Key Take-Aways
As an option approaches expiry, there are three choices to be made: sell the option, exercise the option, or let the expiration expire.
Contracts Impacted By Witching
For those who haven’t heard about options, I’ll give you a quick rundown. Fundamentally, options are derivates which means their value is based on underlying securities like stocks. Each contract represents 100 shares of stock. When you buy an option contract, you speculate on the future stock or strike price.
More Contracts Impacted by Quadruple Witching in the Stock Market
Same idea as the two examples above, but the contracts are standardized with fixed quantities and expiration dates. And futures trade on a futures exchange. Additionally, those who hold stock futures contracts don’t receive dividend payments.
Quadruple Witching Dates
All the asset classes I mentioned above expire four times a year, or once per quarter. To be more specific, the exact time quadruple witching happens at market close (3.00 to 4:00 pm EST).
The Week Before: Beginner Traders Heed Warning
It should come as no surprise that things aren’t the same in the week leading up to quadruple witching. For the last 15 years, the S&P 500 has had 59 witching events. Analysis of the chart shows that the index rallies around the 6th day before to the day before the witching.
Quadruple Witching Over The Last Few Years
The last couple of years have provided plenty of examples of quadruple witching and the increased trading activity these days.
Which 3 Types of Derivative Contracts Expire on Triple Witching Day?
Stock Options: These are contracts taken out on the direction of a stock price at a future date. Unlike stocks, they’re not an investment in a company; rather, they’re the right to buy or sell shares of a company at a later timeframe. Calls let you buy stock shares at a set price, known as the strike price, on or before the expiration date.
When Is Triple Witching? Triple Witching Calendar 2021–2022
In modern trading, triple witching happens on the third Friday of March, June, September, and December (the last month of each quarter).
What Is the Witching Hour?
In the U.S. stock market, the last hour of the trading day, before the closing bell, sees the most trading activity, so the witching hour is from 3–4 pm EST. In folklore, the “witching hour” actually happens in the dead of night, from 3–4 am. It was known as a time when spirits reached the height of their powers.
What Happens During Triple Witching?
As you might imagine, a lot of trading activity happens in the market when stock options, index options, and index futures contracts all expire. We’re talking a lot of money here: during Triple Witching in September 2021, for example, around $3.4 trillion of equity options expired.
How Does Triple Witching Affect the Stock Market?
Triple witching itself doesn’t move the stock market; it just creates increased volume.
Is Triple Witching Bullish or Bearish?
Historically speaking, triple witching is not always an “up” day, and it’s not always a “down” day for the markets. It does not signify a trend. Typically, it neither moves the market significantly higher nor lower; it simply adds a temporary increase in volume and liquidity.
Examples of Triple Witching Volatility in Light of News Events
On June 18, 2021, a record number—$818 billion—of stock options expired, which led to nearly $3 trillion in “open interest,” or open contracts. On this day, the Federal Reserve also announced that it might raise interest rates in 2023 due to inflationary pressures.
