What is a triple witching expiration and why does it matter?

Triple witching, also known as triple witching hour, is the simultaneous expiration of three different types of securities on the same day. These securities are stock index futures, stock index options, and stock options. It occurs on the third Friday of March, June, September, and December.

This Friday, March 17th, is such a day with about $2.8 trillion of notional options exposure rolling off.

Why does it matter?

Triple witching expiration is a critical event for traders because it can lead to increased market volatility. This volatility can result from a variety of factors, including the expiration of options and futures contracts and the need to adjust or roll over existing positions. As traders rush to close out or roll their positions before expiration, the market can become crowded, leading to increased trading activity and price fluctuations.

One reason why traders should be careful during triple witching expiration is that the process of rolling over positions can cause statistical relationships to break down. For example, a trader might roll over a long option position by selling an expiring contract and buying a new contract with a later expiration date. This can drive more choppy action in price discovery, wider ranges of prices, and unusual moves both up and down.

Traders should be careful during triple witching expiration because of the increased volatility as it can lead to unexpected and larger losses. This volatility is further exaggerated by the current low liquidity environment where options trading represents about 70% of all notional value traded, with 50% of all options volume for contracts due to expire in 6.5 hours or less.

In closing

Triple witching expiration is a critical event for traders that can lead to increased market volatility. Traders should be careful when rolling over positions and avoid taking on excessive risk during this period.

While it may be tempting to try and make a quick profit during volatile days, traders should remember that increased volatility and lower liquidity can lead to sudden unexpected losses and therefore exercise caution accordingly. Smaller position sizes, if trading at all, are important to consider.

Understanding the risks associated with triple witching expiration is essential for successful trading in this period. But there is absolutely no shame in not trading during a triple witching day and instead taking the day off to do something else.