Triple Witching: Definition and Impact on Trading in Final Hour

Triple witching is the simultaneous expiration of stock options, stock index futures, and stock index options contracts, all on the same trading day. This happens four times a year, on the third Friday of March, June, September, and December. The expected expiration date for the three might increase trading volume and cause unusual price changes in the underlying assets.

Understanding Triple Witching

Triple-witching days generate more trading activity and volatility since contracts allowed to expire cause buying or selling of the underlying security. While some derivative contracts are opened with the intention of trading the underlying security, traders seeking derivative exposure only must close, roll out, or offset their open positions before the close of trading on triple-witching days.

Triple-witching days, particularly the final hour of trading preceding the closing bell (4 p.m. Eastern time), known as the triple-witching hour, can spike trading activity and volatility as traders close, roll out, or offset their expiring positions.

Single-stock futures, last traded in the U.S. in 2020, were typically grouped with stock options, index options, and index futures, giving rise to the term “quadruple witching.” But they never drew nearly as much capital or trading interest as the other types of equities derivatives, most notably stock options.

Offsetting Futures Positions

A futures contract, an agreement to buy or sell an underlying security at a set price on a specified day, mandates that the transaction take place after the expiration of the contract.

For example, one E-mini S&P 500 futures contract is valued at 50 times the value of the index. If the S&P 500 is at 4,000 at expiration, the value of the contract is $200,000, the amount the contract's owner must pay if the contract expires.

To avoid this, the contract owner closes the contract by selling it before the expiration. After closing the expiring contract, exposure to the S&P 500 index can be continued by buying a new contract in a forward month. This is known as “rolling out” a contract. Much of the action surrounding futures and options on triple-witching days is focused on offsetting, closing, or rolling out positions.

On the expiration date, contract owners can decide not to take delivery and instead close their contracts by booking an offsetting trade at the prevailing price, settling the gain or loss from the purchase and sale prices.

Traders may also extend the contract by offsetting the existing trade and simultaneously booking a new option or futures contract to be settled in the future, which is called “rolling the contract forward.”

Expiring Options

Options that are in the money are similar for those holding 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 can close the position before expiration to continue holding the shares or let the option expire and have the shares called away.

Call options expire in the money, that is, are profitable when the underlying security price is higher than the strike price in the contract. Put options are in the money when the stock or index is priced below the strike price. In both situations, the expiration of in-the-money options causes automatic transactions between the buyers and sellers of the contracts. As a result, triple-witching dates are when all three types of contracts; stock index futures, stock index options, and stock options all expire on the same day causing an increase in trading.

Triple Witching and Arbitrage

Though much of the trading in closing, opening, and offsetting futures and options contracts during triple-witching days is related to squaring positions, the surge of activity can also produce price inefficiencies, which can draw in short-term arbitrageurs—those who seek to profit from them.

These opportunities might be catalysts for heavy volume going into the close on triple-witching days as traders look to profit on small price imbalances with large round-trip trades completed in seconds.

An Example of Triple Witching

Friday, March 15, 2019, was the first triple-witching day of 2019. Trading volume leading up to this third Friday of the month had increased market activity. Trading volume March 15, 2019, on U.S. market exchanges was 10.8 billion shares, compared with an average of 7.5 billion average the previous 20 trading days.

For the week leading into the triple-witching Friday, the S&P 500, Nasdaq, and the Dow Jones Industrial Average (DJIA) were up 2.9%, 3.8%, and 1.6%, respectively. However, it seems much of the gains happened before the triple-witching Friday because the S&P 500 and DJIA increased only 0.50% and 0.54%, respectively, that day.

Triple-Witching Dates

Triple witching happens four times a year (or once a quarter) on the third Fridays of March, June, September, and December.

2024

• March 15
• June 21
• Sept. 20
• Dec. 20

2025

• March 21
• June 20
• Sept. 19
• Dec. 19

2026

• March 20
• June 19
  
• Sept. 18
• Dec. 18

Triple vs. Quadruple Witching

The terms "triple witching" and "quadruple witching" are often used to describe occasions on the third Friday of March, June, September, and December. For about 20 years, they had one difference, but since 2020, they have referred to the same event.

Triple witching occurs when three types of financial contracts expire simultaneously:

• Stock options are contracts that give the holder the right to buy or sell a stock at a specified price.
• Stock index options: Options on stock indices like the S&P 500 or Dow Jones Industrial Average.
• Stock index futures: Futures contracts based on stock indices that obligate the buyer to purchase or the seller to sell the index at a predetermined price on a given date.

The fourth type of contract involved in quadruple witching, single-stock futures, hasn't traded in the U.S. since 2020. Any references to quadruple witching are about the three types of contracts above expiring simultaneously.

Frequently Asked Questions

The Bottom Line

Triple witching refers to the third Friday of March, June, September, and December when three kinds of securities—stock market index futures, stock market index options, and stock options—expire on the same day. Derivatives traders pay close attention on these dates, given the potential for increased volume and volatility in the markets.