What markets are watching with triple witching on tap

It’s triple witching day, which refers to the simultaneous expiration of stock options, market index options and market index futures. The event can lead to higher volatility and more trading volumes, giving speculators an opportunity for quick arbitrage opportunities. It happens four times a year – on the third Friday of March, June, September and December – with much of the increases in activity taking place during the last hour of trading, otherwise known as the “witching hour.”

Snapshot: Interestingly, the day used to be called quad witching, but single stock futures ceased trading when the OneChicago exchange closed up shop in September 2020. Volume spikes happen as positions are closed out, while the rolling over of contracts also boosts turnover. This time around, options tied to around $5T in stocks and indexes are due to expire. It comes on the heels of strong stock options volume in March, which is on track to exceed trading in equities for the first time since late 2021.

“Triple witching does not directly move the market higher or lower, all it does is temporarily increase trading volume and liquidity,” noted SA analyst Marcia Wendorf. “The increased volume and price fluctuations triggered by triple witching cause traders to take action on the underlying assets. This brings in arbitrageurs who use high-frequency trading to try to take advantage… and knowing that can go a long way toward preventing emotional responses to market movements.

What to watch: While triple witching is important for traders, the broader market is also keeping tabs on the event. Call-heavy expirations can agitate stocks, especially when there has been high demand for large-weighted players like Nvidia, and all of the main stock indices fell last week in the leadup to the witching. The move lower also followed a mixed jobs report, with subsequent hotter inflation readings on CPI and PPI, and another session in the red today could see the S&P 500 (SP500) notch a second straight weekly loss for the first time since October.

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