A "triple witching" day occurs when stock index futures contracts, options on the stock index futures, and stock options all expire on the same day.
When one of these derivatives expires, the price of the product tends to swing wildly. When three expire at the same time, chaos can ensue in the options market and it can spill over to the regular stock market.
There are four triple witching days a year. They occur on the third Friday in the months of June, September, December and March. These are the last trading days for all three products; the only days where all three contracts expire on the same day.
Triple Witching days receive a lot of attention because they typically create heavy trading volume and dramatic price swings. Market volume and volatility rises as investors "unwind" positions before their contracts expire.
EXAMPLE: If an Index fund owned 1,000 June S&P futures and wished to maintain that long position, it must sell the June contract and buy a 1,000 September futures by triple witching day.
or
EXAMPLE: A hedge fund that is using options to hedge its portfolio. The hedge fund would need to move, or roll over, its position from the expiring contract into the next available series or month.
Basically, the simultaneous expiration of these three trading products forces a lot of money managers to reposition their portfolios. For individual investors, it's a good day to watch the action from the sidelines.
*Note: Triple Witch is somewhat of a misnomer nowadays. In 1993, in an attempt to lessen the volatility, the last day of trading for the S &P futures contract was moved back one day to Thursday. But the name has stuck.
