What is Triple-Witching and How Does it Affect the Stock Market?
Stocks rallied to record highs on Thursday ahead of one of Wall Street’s scariest-sounding events, set for Friday: a triple witching.
Understanding Triple-Witching
“Triple witching” refers to the simultaneous expiration of stock options, index options, and index futures contracts. It occurs four times a year—on the third Fridays of March, June, September, and December—and can be known to trigger sharp price movements as traders close out or extend existing positions.
Friday’s edition comes at a critical moment for the stock market. The S&P 500 closed at an all-time high on Thursday as stocks rallied after the Federal Reserve cut interest rates by half a percentage point.
Triple-witching days often coincide, as is the case Friday, with S&P index rebalancing, which generates additional trading volume and can contribute to volatility. Palantir (PLTR) and Dell (DELL) will join the benchmark S&P 500 after Friday’s close; so will insurance company Erie Indemnity (ERIE). Those stocks and the ones they’re replacing—American Air Lines (AAL), Etsy (ETSY), and Bio-Rad Laboratories (BIO)—could see high volume on Friday as funds tracking the index buy and sell shares.
Impact on Long-Term Investors
For the majority of long-term buy-and-hold investors, the volatility exhibited on triple-witching days shouldn’t be ominous. Unusual price movements are often short-lived and, because investors know triple-witching is happening, turbulence is unlikely to materially change market sentiment.
Concerns for Active Traders
Triple-witching is of greatest concern to active traders whose derivatives are expiring. The last hour of the session, the triple-witching hour, brings a flurry of activity that can affect liquidity. Sometimes the dynamics of triple-witching result in a less liquid market for a certain security, which increases spreads and creates opportunities for arbitrage, in which a trader exploits price differentials between markets.
Overall, triple-witching often results in greater trading volume and volatility, especially in the final hour of the session. However, the majority of long-term, buy-and-hold investors shouldn’t be too worried, as heightened volatility and unexpected price swings are likely to be short-lived.
It’s important for investors to stay informed about market events and understand their potential impact. By keeping a long-term perspective and staying focused on their investment goals, investors can navigate through periods of volatility and make informed decisions.
Disclaimer: The information provided here is for informational purposes only and should not be considered as investment advice. It is always recommended to consult with a financial advisor or professional before making any investment decisions.
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