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. A common expiration date for the three types of equities derivatives can cause increased trading volume and unusual price action in the underlying assets.

Triple witching is the expiration on the same day of stock options, stock index futures, and stock index options contracts.

Triple witching occurs quarterly—on the third Friday of March, June, September, and December.

Triple witching days can see increased trading activity as traders close, roll out, or offset their expiring positions, particularly in the final hour of trading.

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. While some derivative contracts are opened with the intention of buying or selling the underlying security, traders seeking derivative exposure only must close, roll out, or offset their open positions prior to the close of trading on triple witching days.

Triple witching days, particularly the final hour of trading preceding the closing bell, known as the triple witching hour, can result in escalated trading activity and volatility as traders close, roll out, or offset their expiring 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 E-mini S&P 500 futures contract is valued at 50 times the value of the index.

If the S&P 500 is at 4,000 at expiration, the value of the contract is $200,000, which is the amount the contract owner is obligated to pay if the contract is allowed to expire.

To avoid this obligation, the contract owner closes the contract by selling it prior to expiration. After closing the expiring contract, exposure to the S&P 500 index can be maintained by purchasing a new contract in a forward month. This is referred to as rolling out a contract. Much of the action surrounding futures and options on triple witching days are focused on offsetting, closing, or rolling out positions.

On the expiration date, contract owners can choose not to take delivery and instead close their contracts by booking an offsetting trade at the prevailing price, settling the gain or loss from the purchase and sale prices.

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