Watch Friday’s Triple Witching
Key Points:
- The next Triple Witching (3W) session is this upcoming Friday March 21st.
- 3W sessions are the 4 days per year when index futures, index options, and stock options simultaneously expire.
- Market volatility and traded volumes often spikes, creating arbitrage opportunities alongside heightened risks.
- Track volumes, intraday volatility, and identify price-and-volume combinations that create trading opportunities.
What Is Triple Witching?
Triple Witching is the simultaneous expiration of three equity-linked derivative contracts in U.S. markets:
- Index Futures
- Index Options
- Stock Options
This occurs on the third Friday of March, June, September, and December (some foreign markets experience "Quadruple Witching" as they also trade individual stock futures, but this market doesn’t trade in the US).
The overlapping expirations drive a surge in trading volumes and price volatility as investors close or roll over positions, particularly at the close of trading hours. Daily trading volumes typically rise 20-50% above the 20-day average, but during periods of above-norm market volatility volumes can more than double. For active traders, the volatility of 3W offers unique arbitrage opportunities.
Key Indicators to Track
During the 3W session we focus on:
Volatility (VIX) - the VIX measures the implied volatility in the SP500 options market. Typically, sudden jumps in the VIX correlate with higher volatility in the most traded stocks. One of the trademarks of 3W sessions is the sudden spikes in the VIX, which can be used as alerts for arbitrage chances opening in the equities.
Price Points with High Volume - As the 3W session gets closer to the 4pm close, trading volumes often concentrate around specific price levels. These zones create arbitrage spreads that close up in subsequent sessions, offering short-term trading opportunities.
Pre-emptive Arbitrage Actions
Preparation is critical for maximizing the gains from 3W arbitrage. Employ these pre-emptive strategies to stay ahead of the curve:
Define Limit Orders Based on Price Zones
Patience pays off during 3W. Before the session begins, identify key price zones with heightened trading volumes and set limit orders for entry or exit. Avoid chasing random intraday trends and instead stay disciplined with your pre-identified targets.
Adjust Stop-loss Orders to Reflect Volatility
Increased price swings during 3W increase the risk of stop-loss orders triggering unnecessarily. Adjust your stop-loss levels to reflect the wider price range, ensuring you don’t lock in losses from short-lived volatility surges.
Boost Purchasing Power to Seize Discounts
If your trading portfolio allows, prepare additional purchasing power to take advantage of temporary price dips. 3W often presents "flash discounts" on certain stocks, creating ideal moments to acquire positions at better valuations.
