Triple Witching

Derivatives contract expiry

Exchange-traded options and futures are financial contracts that expire on a certain day. On this expiry day the underlying assets (in the case we’re interested in here, stocks and stock indices) can experience an increased level of volatility. This can be for a couple of reasons:

  1. Traders that have positions in the derivative instruments (e.g. options) may try to influence the closing price of the underlying stocks to which the settlement prices of the derivatives are related. For example, if a trader is long call (or short put) options they might try to ramp the underlying stock in the closing period of trading. Conversely, traders long of puts (or short calls) might try to sell the stock down in the closing period.
  2. If traders with arbitrage positions (i.e. matched holdings in derivatives and underlying stocks) unwind their positions at contract expiry this can create buying or selling pressure on the stocks.

Triple witching

The derivatives contracts that are relevant here are: stock index futures, stock index options and stock options. The expiries of these contracts happen in a programmed calendar throughout the year. However, on four days a year these three different types of derivative all expire on the same day – the third Friday of the months of March, June, September and December. The final hour of these days has come to be known in the US as triple witching hour. And with the introduction of single stock futures, triple witching has become quadruple witching.

Due to the correlation of the US and UK markets, the UK would be affected by US triple witching anyway; however, the UK also has it own version of tripe witching as the expiries of stock options and futures on LIFFE also coincide on the same four days as those in the US.

The chart below shows the recent average trading range (defined as the percentage range between the high and low prices on the day) for the FTSE 100 Index on the triple witching day (day 2) and that for the day immediately prior to it and following it (days 1 and 3 respect.). The dotted line shows the average trading range for all days since year 2000.

Triple Witching Hi-Lo Range (2013) As can be seen the trading range for the three days is higher than that for normal days, with the greatest volatility seen on the triple witching day itself.

The chart below shows the average change in the FTSE 100 Index on the three days around triple witching (which occurs on day 2). The dotted line shows the average change for all days since year 2000.

Triple Witching Average Daily Returns (2013) It can be seen that the average change on triple witching day is significantly above normal.


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