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Triple Witching: What is it and How Can You Deal with it?

quadruple witching triple witching triple witching calendar witching hour Sep 15, 2023
Three stylized modern witches, each holding a derivative symbol - stock index futures, stock index options, and stock options, representing the concept of Triple Witching in the stock market

Triple Witching, with its heightened volatility and increased trading activity, can be a whirlwind for the unprepared. However, with the right approach, investors can navigate these tumultuous days with confidence.


What Is Triple Witching Day?

At its core, Triple Witching is the quarterly event when three types of derivative contracts expire all at once. This convergence can lead to a surge in trading activity, making it a day of heightened volatility. For the uninitiated, it might seem like just another day, but for traders and investors, it's a day that demands attention. This is not particularly bullish or bearish day, but it is a day full of unpredictable events such as trading volume surge, volatility increase, price distortions, liquidity crunch, etc. making it a very uncertain day.

If you are looking for ways to deal with it, here's a roadmap to prepare for Triple Witching days.


1. Stay Informed

  • Mark the Calendar: Be aware of when Triple Witching days occur — the third Friday of March, June, September, and December. (Next 6 dates are: September 15, 2023, December 15, 2023, March 15, 2024, June 21, 2024, September 20, 2024 and December 20, 2024)

    By simply being aware of these dates, you can anticipate potential market volatility.

  • Understand the Mechanics: Familiarize yourself with the basics of Triple Witching — the simultaneous expiration of stock options, stock index options, and stock market index futures. Knowing what's happening can demystify the day's events.


2. Review Your Portfolio

  • Check Expirations: If you hold options or futures in your portfolio, check their expiration dates. If they're set to expire on a Triple Witching day, consider your next steps — whether to roll them over, exercise them, or let them expire.

  • Reassess Hedging Strategies: If you use derivatives as a hedging tool, Triple Witching can be an opportune time to reassess your hedging needs and adjust your positions accordingly.


3. Avoid Knee-Jerk Reactions

  • Stick to Your Strategy: While Triple Witching can lead to short-term market fluctuations, it's essential to stick to your long-term investment strategy. Avoid making impulsive decisions based solely on the day's events.

  • Differentiate Between Noise and News: Recognize that much of the price movement on Triple Witching days might be due to the mechanics of contract expirations rather than fundamental changes in stock or index values.


4. Consider Liquidity Needs

  • Anticipate Potential Liquidity Issues: While Triple Witching often leads to increased trading volume, certain stocks or sectors might experience reduced liquidity. If you plan to make significant trades, be aware of potential liquidity constraints and review average trading volume for your underlying stock holdings.

  • Limit Orders Over Market Orders: Given the potential for price swings, consider using limit orders (which specify a price limit) over market orders (which execute at the current market price) to have better control over execution prices. If you are an OptionPundit student, you know we don't use market orders except only in specific situations.


5. Stay Updated on Broader Market News

  • Monitor Other Influences: Triple Witching can sometimes coincide with other market-moving events, like economic data releases or geopolitical news. Stay updated on broader market events to understand the full context of market movements. You might want to keep a check on Economic calendar (provided for FREE by Econoday).


6. Seek Expert Advice

  • Consult with Financial Advisors: If you're unsure about how Triple Witching might affect your portfolio or investment strategy, consider consulting with a financial advisor or investment professional. They can provide tailored advice and insights. If you are an OptionPundit community member, you can always seek out help from trading buddies or mentors.


In Conclusion

Triple Witching days, with their unique blend of volatility and opportunity, underscore the dynamic nature of financial markets. For investors and options traders, preparation is key. By staying informed, sticking to proven strategies, and seeking expert advice when needed, you can turn these seemingly chaotic days into just another step in their financial journey.

Remember, in the world of investing, knowledge and preparation are your most potent allies.


Happy Trading,

Manoj Kumar

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