Triple Witching Fridays.. and why they matter
Triple witching.. seriously?
“Triple Witching” might sound like something from a fantasy (or a horror) movie, but it’s actually a financial term.
Essentially, it’s the day when 3 types of financial derivatives expire simultaneously:
- Stock Options: These are contracts taken out on the direction of a stock price at a future date. Options have grown tremendously in popularity among retail investors thanks to mobile apps like Robinhood that offer the possibility to trade options commission-free.
- Index Options: These are option contracts on a stock index, such as the S&P 500. Indexes have a number of advantages (including preferential tax treatment in the United States) compared to ETFs and as such play a key role in institutional and retail investors’ portfolios.
- Index Futures: These are futures contracts on stock indexes.
Triple Witching is a relatively rare event happening only 4 times a year but can cause wild swings in volatility.
Professional traders know this phenomenon well and prudently keep track of it, which is not always the case for most retail investors.
Why should I care?
First of all, for those who do trade options and try to benefit from the market volatility it’s crucial to keep track of Triple Witching schedule.
For example, if someone trades a so-called “calendar spread” (buying and selling the same option contract but with a different expiration date) it could make sense to end it on one of Triple Witching Fridays.
For those who trade only stocks, keeping track of Triple Witching could still make sense due to the following:
a) On Triple Witching Friday itself the increased trading volume often leads to volatility spikes, as such it might make sense for more risk-averse investors to exit/adjust their positions before that day.
b) Historically, the first week AFTER it tends to be quite bearish for the stock market, one extreme example being a “Black Monday” that happened right after the triple witching on October 19, 1987, when the Dow Jones Industrial Average lost 22.6% in a single trading session.
Saying all that, Triple Witching is just one of many events that pro traders routinely track. Needless to say, it can be difficult and time-consuming to keep an eye on all upcoming events.
That’s why we’re building Strikes.
Strikes is a stocks & options trading app that extracts and translates useful information using AI, shows you trading opportunities right there on the home screen, monitors data sources to save you time, and notifies you of potential threats. All while keeping jargon to a minimum.
Thanks for reading!
DISCLAIMER: Strikes is not a registered investment advisor. The calculations, information, and opinions on this blog (and the corporate website) is for educational purposes only and do not constitute investment advice.