When "triple witching" day comes to the market
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Friday is a "triple-witching day" when over $7 trillion of stock options, index options and index futures are set to expire at the same time as portfolios and indexes are rebalanced.
Why it matters: That probably sounds awfully technical, but this quarterly convergence can trigger huge volume while investors roll positions, hedge exposures, or let contracts expire. Things can get crazy!
Catch up quick: Citi estimates that $7.1 trillion of equity options will roll off at once on Friday. But what even is triple witching? Here is a primer:
- Options are contracts that give investors the right, but not the obligation, to buy or sell a stock or index at a set price by a certain date.
- When options expire, traders must close, roll, or let positions lapse, which can drive trading volume, and Piper Sandler expects triple witching today to be the fourth-largest trading volume day ever.
- Triple witching happens four times a year — in March, June, September and December — when stock options, index options and index futures all expire on the same day.
- Indexes and ETFs are rebalanced that same day, which means companies could also be added or kicked out of the S&P 500 on triple witching, with Carvana added to the index this time around.
What they're saying: "This is why you want to be in the S&P 500…because of days like this where they rebalance and put stronger stocks in," Jay Woods, chief market strategist at Freedom Capital Markets, tells Axios.
- He cites two years ago when Uber Technologies was added to the S&P 500 and Alaskan Airlines was kicked out as a prime example.
Reality check: Despite their reputation for mischief, triple witching days have historically been high volume, but low volatility, per a note from Citi.
- Intraday volatility on triple witching days has been lower than other monthly expiries on average, using open high and low close data.
- That is because traders know these days are coming far in advance, giving them time to neutralize exposure before the final trading hours.
The bottom line: High volume does not always mean huge price swings.
