As a novice trader, there are certain terms and phenomena that you’ll likely encounter within your first few months. One such term shrouded in intrigue and speculation is “triple witching”. This event, often associated with market volatility, has a host of theories regarding its impact on the markets. Despite the hype, much of it is simply speculation, but it undeniably ushers in a turbulent period each quarter. Let’s demystify the mystique surrounding triple witching and delve into its true nature.

Unraveling the Enigma of Triple Witching in Trading

At its core, triple witching refers to a week when stock options, stock index futures, and stock index options all expire on the same day. This event transpires four times a year: on the third Friday of March, June, September, and December. If you’re new to trading, this concept might seem elusive. With the advent of single stock futures in 2022, the term “quad witching” also emerged but is comparatively less common. Traders anticipate triple witching weeks due to the heightened market volatility leading up to the last trading hour of the week.

The Witching Hour: A Period of Volatility

But first, let’s address the question: why the association with witchiness?

Certain times of the night, or specific moon phases, have long been linked with the idea of supernatural events, hence terms such as the “witching hour,” “the witching moon,” and so forth. These periods are perceived as unusual times when abnormal things can occur.

The final trading hour on a triple witching day has earned the moniker “the witching hour” due to the atypical happenings during this period—most notably, immense volatility. So, what triggers this surge in volatility as these three types of financial instruments expire?

Stock Options, Index Futures, and Index Options: The Three Witches

Stock options have numerous expiration dates given the expansion of offerings as options trading has evolved over recent years. However, the third Friday of the month, colloquially known as “options expiration” or “Op-Ex,” has been the traditional expiration date. As this practice continues to be widely followed, there tends to be a large number of expiring options on Op-Ex each month. The exercise of these contracts triggers extensive buying and selling in the underlying stocks, often resulting in substantial volume as market makers purchase shares needed as contracts are exercised. The options contracts themselves can see massive volatility as most contract holders aim to close out their contracts before expiration, leading to increased volume and volatility in the days leading up to Op-Ex.

Stock index futures and Stock index options also expire on the third week of March, June, September, and December. While these instruments are unique and complex in their own ways, it’s the simultaneous expiration of these three types of instruments that causes the frenzy. This convergence results in massive buying and selling, often leading to unbelievable volume and volatility, thereby giving rise to the enigmatic term “triple witching.”

Navigating the Triple Witching: A Word of Caution

Triple witching is not a time for green traders to plunge into the fray. Seasoned traders may capitalize on the massive volatility to make significant profits. However, less experienced traders might fare better by steering clear of this period, as it often brings unexpected volatility.

As we are in a triple witching week, remember that Friday from three to four pm is the witching hour. Stay cautious, stay informed, and trade wisely.