What is a triple witching and how can you trade it?
Rebecca Cattlin June 9, 2021 6:56 AM
The next triple witching – when stock options and futures expiries collide – happens on June 18. Learn about what triple witching is and how you can trade a triple witching in the build-up to the next event.
What is a triple witching?
Triple witching is when the expiration of stock options, stock index futures, and stock index options all fall on the same day. It only happens four times a year – on the third Friday of March, June, September, and December – which can create a spike in trading volume and volatility.
Sometimes triple witching is called quadruple witching, as single stock options were added in 2002 and also expire on the same quarterly dates.
Unlike investing, using derivatives like futures and options carry an expiry date. This has the benefit of enabling traders to speculate on what the price of the underlying market will be over a specific period. Once the expiry date arrives, any contract holders will need to buy or sell the underlying asset in question.
On a triple witching day, nearly double the number of contracts expire than in any other week, which is what creates the market movements that triple witching day is known for.
The underlying markets will see volatility in the week leading up to triple witching, but the most active period is the final hour before the market closes on the day, known as the witching hour. This is when parties rush to close their positions, offset them or roll them over. Even those who have only opened speculative positions on the futures or options contracts will need to decide whether to close, offset, or roll over their trade at expiry.
Sometimes, triple witching events can come and go with little volatility. This is especially true after weekly and daily expirations became available, as activity became more spread out. However, it will all depend on the context in which the event happens, so it’s important to look at news and analysis in the run-up to the witching day.
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Triple witching calendar 2021-2022
- June 18, 2021
- September 17, 2021
- December 17, 2021
- March 18, 2022
- June 17, 2022
- September 16, 2022
- December 16, 2022
How to trade triple witching
There can be trading opportunities in both the run-up to, and the day of, a triple witching. So, it’s important to get ready for the event ahead of time. You can speculate on whether the price of stocks, stock options, and index futures will rise or fall with FOREX.com.
Prepare to trade in four steps:
- Open an account with FOREX.com, or log in to your account
- Find the market you want to trade
- Decide whether you think the price of the underlying will rise or fall on expiry
- Take your position and monitor the market
Options expiring on triple witching
When you’re the holder of a stock option or stock index option – having bought either a call or put option – your decision of what to do on triple witching day will depend on its state of moneyness. If your option is in the money (ITM), you’ll likely want to exercise it – buying or selling the underlying shares or index.
Alternatively, if the option was out of the money (OTM) at expiry, you might consider letting the contract expire worthless. In this case, you’d only incur the cost of the premium you paid to open the position and could take a new position on the next month’s expiry.
When you’re the seller of an option that expires on triple witching, you won’t have much choice over what happens to your position. Inherently selling options takes away your right to refuse to exchange your underlying asset at expiry – so if the option’s holder wants to execute the trade, you would be obliged to fulfil your end of the contract. But whatever happens, you’ll receive a premium.
Futures expiring on triple witching
A futures contract differs from an option, in that it has to be fulfilled on expiry regardless of whether the outcome is profitable. There are three ways to navigate the expiry of a futures contract on triple witching:
Settle the position – either physically by arranging the delivery of the asset or with the equivalent amount in cash
Roll the position over – this pushes the expiry of the contract back into the next month. Doing so will likely incur a cost to account for the differences in price
Offset the position – you could buy or sell the equivalent amount to balance your futures trade before the expiry.
Learn more about futures contracts.
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