Triple Witching Effects on Trading
Triple Witching Friday happens on the third Friday of every third month (March, June, September, and December). It 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. The simultaneous expiration of the three types of markets is the reason these days are called "triple witching". However, 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.
Quadruple witching is more accurate, but the term never caught on. Therefore, triple witching remains the more common term used by traders.
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 (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 upon their trading style, their trading strategies and primarily their level of trading experience. New traders will want to be more cautious in the days leading up to, and including triple witching.
Many traders do notice that the markets act "differently" during these triple witching weeks/days. 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 (based on tendencies and statistical biases typically noted during these weeks). 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.
Triple/quadruple witching does not include all of the stock index futures and options contracts. So, even though triple witching is the most talked about expiration event, they are not the only expiration days.
Final Word on Triple Witching
Triple or quadruple witching is when a number of futures and options expire, on the same day, on the third Friday of March, June, September, and December. The market can act differently during the week of, and the day of, triple witching. Short-term traders should adapt their strategies to these conditions, or avoid trading (or reduce position size) if they notice their performance deteriorates during this time.