Triple witching refers to the four times each year when stock index futures, stock index options and options on individual stocks expire simultaneously. It is a quarterly phenomenon that spooks investors, at least those who are not yet familiar with the event and how it affects trading.
A lot of trading activity happens during triple witching. It involves a lot of money and contributes to market volatility. During the September 2021 Triple Witching, around $3.4 trillion of equity options expired. In June this year, Goldman Sachs' estimate put simultaneous expirations on the same amount.
Triple witching happens on the third Friday of March, June, September and December. The one for September happened on the 16th but as 2022 enters its final quarter, it wouldn't hurt to be prepared for when the last triple witching of the year happens on Dec. 16.
Underlying markets are expected to 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. Because prices can change even more than usual, decisions to buy or sell also bring about risks beyond the usual.
Steven Feinstein and William Goetzmann in their paper titled The Effect of the "Triple Witching Hour" on Stock Market Volatility, wrote that "the change in stock market prices over the course of a triple witching hour day was likely to be greater than the price changes experienced over most ordinary trading days."
Triple witching sees large blocks of stock change hands as hedgers, arbitrageurs and speculators seek to maximize returns or minimize losses as they settle the contracts entered into previously. The phenomenon brings about higher volatility driven by large mismatches between buy and sell orders due to the flood of orders submitted by agents covering or settling positions.
Triple witching can cause increased trading volume and unusual price action in underlying assets as traders close, roll out or offset their expiring positions. It generates trading activity and volatility because contracts that are allowed to expire may necessitate the purchase or sale of underlying securities.
Feinstein and Goetzmann noted that if the witching hour effect systematically influences stock price volatility, it should also influence the pricing of stocks and derivative instruments. With the higher trading volume also comes more new information that could push prices one way or another.
Triple witching sees the simultaneous expiration on the same day of three classes of options. There are also cases when two classes of options on the same underlying securities expire on the same date and this event is referred to as double witching. Accordingly, it is quadruple witching when it involves the expiration on the same date of four options classes. The latter started in 2022 with the debut of single stock futures but the term has not quite caught on yet.
Regardless of what type of witching you are dealing with, it always presents trading opportunities both in the run up to and the actual day of witching.