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Triple Witching Day

Definition: "Triple-witching" day is the third Friday of the month that ends each quarter. It marks the simultaneous expiration, at the close, of stock options, index options and index futures."

Implications: The impact of "triple witching" has been associated with increases in the volatility of the market. The increased volatility increases the uncertainty about prices of the underlying stocks.

Stock options that are exercised, or the underlying stock bought/sold, creates large additional volume. With unwinding large volumes of stocks, there is an increase in index arbitrage (i.e., the simultaneous purchase of index futures and the sale of a basket of stocks, or vice versa, when the values of the index and the underlying stocks become "out of wack" with each other). Meanwhile, some investors are trying to unscramble whether to, say, buy/sell a position, in options or futures contracts, similar to their current ones (i.e., roll-over the existing contracts) or get into different ones.

The increased volatility has prompted the options industry, with the blessing of the SEC, to take some action. Although options on the S&P 100 and on stocks still expire at the close, S&P 500 options and futures have been moved up to settle for cash based on opening prices on expiration Friday, according to Barron’s June 24 (1996) edition.

There is one other reason for the increase in volatility that the article did not even mention. The composition of the Russell 2000 index, a barometer for small-cap stocks, is reconfigured each June by Frank Russell Co., which created the index. Thus, there is added trading activity in the delisted stocks (i.e., removed from the index) as well as those added to the index.