As options and futures contracts expire, traders must close or roll out their existing positions to a future expiration date. Triple Witching occurs because the expiration dates for stock options, stock index futures, and stock index options all fall on the same day. Stock options give the holder the right to buy or sell a stock at a specific price on or before the expiration date. Stock index futures allow traders to bet on the future direction of a stock index. Stock index options give the holder the right to buy or sell a stock index at a specific price on or before the expiration date.
During Triple Witching, traders and investors often try to close out their positions or roll them over into the next expiry month. This can create a significant amount of trading activity which affects volumes and creates extra volatility in the markets. In summing up, triple witching stands as a noteworthy event in the financial landscape, shaping unique opportunities and hurdles for market enthusiasts.
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- To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice.
- Traders may be closing out stock and index positions, closing out a hedge position matched to a contract or raising cash from other positions to fund their purchase of a contract’s deliverable.
- This happens four times a year, on the third Friday of March, June, September, and December.
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Palantir (PLTR) and Dell (DELL) will join the benchmark S&P 500 after Friday’s close; so will insurance company Erie Indemnity (ERIE). Those stocks and the ones they’re replacing—American Air Lines (AAL), Etsy (ETSY), and Bio-Rad Laboratories (BIO)—could see high volume on Friday as funds tracking the index buy and sell shares. Options expiration day is always the third Friday of every month and is typically volatile. Traders may also decide to exercise these stock options, choosing whether to take delivery on long call options and exercise put options.
How Does Triple Witching Impact the Stock Market?
However, carelessly choosing an expiration date is one of the most common mistakes when trading options, often leading smart money moves when getting a raise or promotion traders astray. The term «triple witching» refers to the extra volatility resulting from the expiration dates of the three financing instruments, and is based on the witching hour denoting the active time for witches. The world of finance is filled with colourful jargon, and «triple witching» is no exception.
Are There Strategies Traders Can Use For Triple-Witching Dates?
An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or lifestyle. top 10 best forex trading strategies and tips in 2020 Only risk capital should be used for trading and only those with sufficient risk capital should consider trading.
Traders and investors, in a flurry, realign or dissolve their positions in the wake of expiring contracts. This flurry, marked by an upsurge in trading volume, often catalyzes pronounced price oscillations and an unpredictable market demeanor. Every third Friday of March, June, September, and December, three financial instruments—stock index futures, stock index options, and stock options—expire at the same time.
With single stock futures ceasing to trade, there are only three types of derivatives with concurrent expiry on four days of the year. Derivative contracts, such as futures and options, derive their value from the price movements an underlying asset. Futures and options contracts are agreements to exchange underlying asset at a future date and price. The history of the stock market is filled with dramatic events, and triple witching days have certainly contributed their fair share of excitement. Analysing past occurrences can provide valuable insights into how these events unfold and what lessons traders can glean for the future. However, as of 2020, these single-stock futures contracts no longer trade in how to issue corporate bonds the U.S. markets.