DEFINITION of 'Triple Witching'

Triple witching occurs when the contracts for stock index futures, stock index options and stock options expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December. Triple witching days, particularly the final hour of trading preceding the closing bell, can result in escalated trading activity and volatility as traders close, roll out or offset their expiring positions.

Since 2002, triple witching days have also included the expiration of single stock futures, meaning there are actually four types expiring contracts, but the term quadruple witching has never caught on.

BREAKING DOWN 'Triple Witching'

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.

Offsetting Futures Positions

A futures contract, which is an agreement to buy or sell an underlying security at a predetermined price on a specified day, mandates the agreed-upon transaction to take place after the expiration of the contract. For example, one futures contract on the Standard & Poor’s 500 index (S&P 500) is valued at 250 times the value of the index. If the index is priced at $2,000 at expiration, the underlying value of the contract is $500,000, 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.

Expiring Options

Options that are in the money present a similar situation for holders of expiring contracts. For example, the seller of a covered call option can have the underlying shares called away if the share price closes above the strike price of the expiring option. In this situation, the option seller has the option to close the position prior to expiration to continue holding the shares, or allow the option to expire and have the shares called away.

Triple Witching and Arbitrage

While much of the trading in closing, opening and offsetting futures and options contracts during triple witching days is related to the squaring of positions, the surge of activity can also drive price inefficiencies, which draws short-term arbitrageurs. These opportunities are often the catalysts for heavy volume going into the close on triple witching days, as traders attempt to profit on small price imbalances with large round-trip trades that may be completed in seconds.

RELATED TERMS
  1. Witching Hour

    Witching hour is the final hour of trading on the days that options ...
  2. Quadruple Witching

    Quadruple witching refers to a date that entails the simultaneous ...
  3. Expiration Date (Derivatives)

    The expiration date of a derivative is the last day that an options ...
  4. Expiration Time

    The expiration time of an options contract is the date and time ...
  5. Roll Forward

    Roll forward is closing a shorter-term derivative contract and ...
  6. Contract Month

    The contract month is the month in which a futures contract expires.
Related Articles
  1. Investing

    How Today's Quadruple Witching Will Affect Trading

    When stock index futures, stock index options, stock options, and single-stock futures all expire Friday, volume is likely to spike. Will the S&P fall?
  2. Trading

    Stock Futures vs. Stock Options

    A quick overview of how stock futures and stock options work and why you would pick one over the other depending on the strategy being used.
  3. Trading

    Getting acquainted with options trading

    Learn about trading stock options, including some basic options trading terminology.
  4. Trading

    A Quick Guide To Debt Options

    A look at trading options on debt instruments that include U.S. Treasury bonds and other government securities.
  5. Investing

    Why Options Trading Is Not for the Faint of Heart

    Trading options is not easy and should only be done under the guidance of a professional.
RELATED FAQS
  1. What happens when a security reaches its strike price?

    Learn more about the moneyness of stock options and what happens when the underlying security's price reaches the option ... Read Answer >>
  2. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  3. What is the difference between open interest and volume?

    Learn how to interpret the relationships between price, volume and open interest in the options and futures markets. Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center