Triple Witching Effects on Trading

Commodities traders looking at a screen
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Triple Witching Friday happens on the third Friday of March, June, September, and December, and is the simultaneous expiration (or rollover) of various futures and options contracts. Many U.S. stock index futures, stock index options, and stock options expire on these days. With the addition of single stock futures contracts in 2002, which also expire on these days, triple witching is sometimes referred to as quadruple witching—which is more accurate, but the term never caught on. Triple witching remains the more common term used by traders. 

Effects on the Market

Futures and options contracts, unlike a stock, have an expiration date. Large bets have been placed in the futures markets, and triple witching is when those traders will have to decide if they will roll their futures contracts over and maintain a position in a non-expired contract, or close their futures position, which could be buying or selling, depending on the direction of their original trade. 

Options traders also find out if their options expire in or out of the money. On such days, traders with large positions in these contracts may be financially incentivized to try to temporarily push the underlying market in a certain direction to affect the value of their contracts. The expiration forces traders to act by a certain day, causing trading volume in affected markets to rise. 

Triple or quadruple witching is often said to cause volatility in the underlying markets, and in the expiring contracts themselves, both during the week preceding, and on the expiration day. In some cases, this may be true, but triple witching can also be a rather calm event, with lower volatility and a statistical bias to the upside (at lease for S&P 500 futures) during the week of and on triple witching.

What to Watch For

Because of the increased volume, the chance of some abnormal price moves—and a statistical bias which may cause some day trading strategies not to work (which work during non-triple witching weeks/days)—some day traders recommend caution, and others recommend not trading at all. How an individual day trader chooses to handle triple witching will depend on their trading style, trading strategies, and level of trading experience. New traders will want to be more cautious in the days leading up to and on Triple Witching Friday.

If a day trader opts to trade during these weeks, measures should be taken to ensure the strategy being used works in such an environment, or a new strategy can be constructed specifically for this week. Swing traders and investors are unlikely to be significantly affected by the event, but swing traders may wish to take note of any statistical biases present during the week of triple witching.

The Bottom Line

Triple and quadruple witching does not include all of the stock index futures and options contracts, so even though they are the most talked about expiration events, they are not the only expiration days. Short-term traders should adapt their strategies to these conditions, avoid trading, or reduce their position size if they notice their performance deteriorates during this time.