The ‘Triple Witching’ hour is upon us. Here’s what that means and how it could affect markets
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Around this time every three months, Wall Street investors are nervously watching and waiting for an event that could potentially cause a bit of turmoil in the markets. That event is called “Triple Witching”.
Apart from the fact it sounds cool, Triple Witching (sometimes even “Quadruple Witching”) usually sends trading volumes in the US stock markets to spike significantly.
Triple Witching is the day when three derivatives contracts expire. In the US, this happens on the third Friday of every March, June, September, and December.
In June, this falls on Friday the 19th (US trading time).
The three derivatives contracts – Index Options, Index Futures, Single Stock Options – will all expire at the same time tomorrow, which could result in volatility as derivative traders rebalance (more on this below).
The event is also sometimes called Quadruple Witching to include single-stock futures expiry, but those usually have little impact.
What happens on the day is usually the domain of big money managers, but it would obviously have an impact on retail investors too.
As the market approaches the “triple witching hour”, which is between 3pm-4pm New York time, derivative traders would typically be frantically scrambling to re-hedge their books.
There is a lot of uncertainty in this last hour, as some of the expiring options would hover so close to the underlying index level, that they would swing between expiring in or out of the money.
And this is where it could get a tad too technical for the average investor.
The option’s gamma risk would exhibit an extremely volatile behaviour in this last hour, creating more uncertainty over how much the trader would need to rebalance their books.
In general, once the option contract expires, the hedge associated with it is longer needed, which would necessitate traders to dump these hedging positions in the market.
At the same time, all open derivatives contracts would also have to be delivered in the open market.
This flurry of decision-making action usually unleashes a wave of trading activities.
The Nasdaq, for example, has estimated that 40 per cent of its flow on triple witching days is due to these activities.
And in the past year, triple witching days have brought on a fall in the major stock indices in the US.
Firstly, the expiry date for equity options on the ASX is usually the Thursday before the last business Friday in the month.
Also, open positions in the ASX derivative markets are relatively low compared to the US, and expiry dates don’t usually create such a big increase in trading volumes here.
However, given that the ASX typically follows sentiment on Wall Street, investors might be well placed to keep an eye on the event.