In the financial world, there is a lot of jargon. And if you’re not familiar with the lingo, it can be difficult to understand what’s going on. One term you may have heard is “triple-witching.” But what does that mean? In short, triple-witching refers to the simultaneous expiration of three different types of derivatives contracts. These contracts are typically options and futures contracts. And because they all expire at the same time, it can cause some volatility in the markets. In this blog post, we’ll take a closer look at triple-witching and how it can impact the markets. We’ll also discuss some strategies that investors can use to protect themselves during these times of heightened volatility.
Understanding Triple Witching
Triple-witching refers to the quarterly expiration of three types of derivative contracts: stock options, index options and index futures. These contract expirations can occur on the same day, which is referred to as “triple witching.”
The triple-witching hour is the last hour of trading on the third Friday of every quarter. In this final hour, all stock options, index options and index futures contracts that are set to expire on that day are traded.
The triple-witching hour can be a volatile time for markets. This is because investors rush to buy or sell contracts before they expire. This can lead to sharp movements in prices and increased volume.
Offsetting Future Positions
It’s important to note that not all options positions are created equal. Some are meant to be held until expiration, while others may be offset before then. There are a couple different reasons why an investor might choose to offset a position.
The first is if the price of the underlying security has moved in the desired direction. Thus, the investor wishes to lock in their profits. Another reason might be if the investor no longer believes that the price of the security will move in the desired direction. Hence, they wish to cut their losses. Whatever the reason, it’s important to know how to offset a position so that you can manage your risk accordingly.
The process of offsetting a position is relatively simple. If you have a long position, you would sell an equivalent number of contracts. If you have a short position, you would buy an equivalent number of contracts. Once the trade is executed, your position will be closed out and you will have no further exposure to the security.
It’s worth noting that you can also offset positions using options strategies. For example, if you have a long call option, you could offset it by selling a put option with the same strike price and expiration date. Or, if you have a short put option, you could offset it by buying a call option with the same strike price and expiration date. There are many different options strategies that can be used to offset positions. So it’s important to understand all of your options before making any decisions.
Triple Witching and Arbitrage
Triple-Witching is when the markets are flooded with short-term trading opportunities. This happens when three different types of contracts all expire on the same day. These contracts are options, futures, and index options. Short-term traders take advantage of these opportunities by selling high and buying low.
Arbitrage is another way to make money off of triple-witching. Arbitrage is when you buy a security in one market and sell it in another market for a higher price. For example, you could buy a stock in the morning in New York and then sell it in the afternoon in London for a higher price.
Real-World Example of Triple Witching
When it comes to trading, triple witching is often referred to as the triple threat. This is because on the third Friday of March, June, September, and December; all three major types of options contracts expire. This includes stock options, index options, and futures options.
For example, let’s say you are long 100 shares of Apple (AAPL) stock and you bought a put option on the SPY ETF with a strike price of $210 that expires on the third Friday in March.
On triple witching day, your AAPL stock might be down 2% while the SPY is up 1%. If the market closes like this, your long AAPL position would be down 2% while your short SPY position would be up 1%. Overall, you would be down 1%.
Conclusion
If you’ve ever wondered what triple-witching is, or how it affects the stock market, I hope this article has helped to clear things up. Triple-witching is a phenomenon that occurs three times a year when certain types of options and futures contracts expire on the same day. This can lead to increased volatility in the markets as investors attempt to buy or sell these contracts before they expire. While triple-witchings can provide opportunities for traders, they can also be risky, so it’s important to know what you’re doing before getting involved.