Benefit from Triple Witching

What is Triple Witching and when does it occur in Trading?  We are not talking about Macbeth here. There is no shortage of tricks and spells. Not to mention toil and trouble if you trade indexes and stocks and do not understand it.

Options expire every weak, month or quarterly. Triple Witching is different. At TW a lot of weekly. monthly and quarterly options expire at the same time.

It occurs four times a year at the end of each quarter. It happens in March, June September and December on the third Friday of the month. it is all about the expiration of futures and options contracts.

Triple Witching Hour

The final trading hour for that Friday is the hour known as triple witching. The markets are quite volatile in this final hour, as traders quickly offset their option/futures orders before the closing bell. If you are a long-term investor, TW will have a minimal impact on you.

Read more:  Investpedia

A prior episode of Market Measures on the tastytrade network took a closer look at TW and analyzed some historical data that provides added insight for traders on the type of market action one can expect to see during Freaky Friday.

On this episode, there were two primary questions that drove the investigation into triple witching market action:

  1. Are there discernible market themes leading up to, during, and following the week of triple witching week?
  2. How does TW differ from a normal expiration week?

To kick-off the analysis, the research team first back-tested historical data from the SPX to see how it performed in the week prior to, the week of, and the week after triple witching. Hosts Tom Sosnoff and Tony Battista have long estimated that the market generally trends higher during expiration weeks, and this study put their opinion to the test.

The resulting data was then broken into four categories – 1 year, 3 years, 5 years, 10 years – and is depicted in the chart below:

Triple Witching_MarketMeasures
What we have found was that the week of expiration and the day of expiration were strongly biased to the upside. We also see that the probabilities normalise the week after.
SPX after Triple Witching

Benefit from Triple witching

A lot of options expires on triple witching. Take care of options that are in the money. It won’t be a good idea to be long at Thursday and Friday. The week after Triple Witching will most likely be down.