Triple Witching- What you need to know about today's trading session

Triple witching is a quarterly event in the financial markets where three types of derivative contracts—stock options, stock index futures, and stock index options—all expire simultaneously. Occurring on the third Friday of March, June, September, and December, this event often leads to increased trading volume and market volatility as traders rush to close or roll over their expiring positions. The heightened activity during triple witching can cause significant price swings, particularly in the final hour of trading, known as the "witching hour."

During triple witching, options traders typically engage in a variety of actions to manage their positions. Some traders choose to close out their expiring positions by either buying or selling the underlying assets to offset their contracts, while others may roll over their positions by replacing expiring contracts with new ones that have later expiration dates. Additionally, if options are "in-the-money" (profitable), traders might exercise these options, which can lead to significant buying or selling of the underlying assets, further contributing to market volatility.

The notional value of options set to expire during this triple witching session is estimated at $5.1 trillion, according to derivatives analytics firm Asym 500. Of this, $2.6 trillion is tied to index options, $620 billion is linked to futures options, $635 billion is tied to ETF options, and $600 billion is tied to single-stock options. This large-scale expiration event, particularly with a significant portion focused on major indices like the S&P 500, can create substantial market movement as traders adjust their portfolios.

Historically, the market has shown a tendency to exhibit increased volatility following triple witching events, especially in September. According to the Stock Trader’s Almanac, the S&P 500 has, on average, declined by 1.1% in the week following September triple witching since 1990. There have been only a few exceptions, such as in 1998, 2001, 2010, and 2016, where the market saw gains. This historical pattern suggests that traders often approach the period following triple witching with caution, particularly in a month known for weak seasonality.

The timing of this triple witching event adds another layer of complexity, as it coincides with a significant rebalancing of the S&P 500. Stocks being added to or removed from the index, such as Palantir, Dell, and Erie Indemnity replacing Etsy, Bio-Rad, and American Airlines, can see large trading volumes as index funds adjust their holdings. This rebalancing can further amplify market volatility, particularly for the stocks involved and the broader index.

In the current market context, this triple witching comes on the heels of the Federal Reserve’s recent interest rate cut, which has already injected a degree of uncertainty and volatility into the market. The Cboe Volatility Index (VIX) remains elevated, indicating that investors are cautious. The combination of triple witching and the S&P 500 rebalancing creates a scenario where market movements could be sharper than usual, with the potential for both significant gains and losses.

For active traders, triple witching presents both opportunities and risks. The increased volume and potential for price discrepancies can create arbitrage opportunities, where traders exploit temporary price differences between markets. However, the heightened volatility also means that traders need to be vigilant about risk management, as the rapid movements in prices can lead to significant losses if not carefully managed.

For long-term investors, the volatility associated with triple witching is typically short-lived and may not warrant major portfolio adjustments. While the market may experience temporary turbulence, the impact of triple witching is often more of a concern for short-term traders rather than those with a longer investment horizon. However, staying informed about the event’s potential market impact can help all investors make more informed decisions.