The Halloween holiday may be over for this year, but the spookiness continues!

Today we are taking a closer look at "Triple Witching," also known as "Freaky Friday."

Triple witching is a term popularized within the investments industry to represent a unique quarterly occurrence involving the expiration of three different financial contracts on the same day. The next triple witching will occur Friday, Dec. 18.

Technically speaking, "Triple Witching Hour" is the last hour of trading (3-4pm Eastern Standard Time) on the third Friday of every March, June, September, and December. The conclusion of this hour represents the converging expiration of three products: stock market index futures, stock market index options, and stock options.

The event gained notoriety because the three simultaneous expirations have tended to inflate trading volume of futures, options, and underlying stocks throughout that particular day.

While many traders may have already closed or rolled positions prior to triple witching, there is still typically an increase in activity for those that have waited until the last possible hour (or minute) to adjust their portfolios/positions.

A prior episode of Market Measures on the tastytrade network took a closer look at Triple Witching and analyzed some historical data that provides added insight for traders on the type of market action one can expect to see during Freaky Friday.

On this episode, there were two primary questions that drove the investigation into triple witching market action:

  1. Are there discernible market themes leading up to, during, and following the week of triple witching week?
  2. How does triple witching differ from a normal expiration week?

To kick-off the analysis, the tastytrade research team first back-tested historical data from the SPX to see how it performed in the week prior to, the week of, and the week after triple witching. Hosts Tom Sosnoff and Tony Battista have long estimated that the market generally trends higher during expiration weeks, and this study put their opinion to the test.

The resulting data was then broken into four categories - 1 year, 3 years, 5 years, 10 years - and is depicted in the chart below:

Triple Witching_MarketMeasures

As one can see from the above, there has been a clear bias in recent years for the market to trend up during a triple witching expiration week and day.

However, not stopping there, the Market Measures team sought to provide further context around triple witching by looking at the mean move of the SPX in the week prior, during, and after triple witching.

In this study the findings, as shown below, were again rather revealing:

Triple Witching SPX_Market Measures

 

This particular snapshot of the data provides evidence that the actual day of triple witching may be slightly more biased toward upward movement than the entire week, especially in the last few years.

Some research conducted by a contributor at Forbes reinforces the findings of the tastytrade financial network while also providing a comparison with other expiration cycles as opposed to only triple witching. However, author Rocky White starts out early by confirming some of the same findings as tastytrade.

Using data from from 2010 to 2012, the Forbes article by Mr. White entitled "Stocks that Love To Fly During Triple-Witching Weeks,” notes:

Expiration weeks have been weak overall during this timeframe, but triple-witching expiration weeks have actually been quite bullish. Eight out of 10 have been positive, and these weeks average a return of almost 1%.

In his article, Mr. White goes on to detail some of the better performing individual stocks from triple witching weeks again using data from 2010 to 2012. What's especially interesting about this research is that it highlights that the best performing triple witching stocks have generally performed on average a lot weaker during other, non-triple witching, expirations.

For further insights on triple witching we recommend you watch the full episode of Market Measures focusing on the topic when your schedule allows.

If you have any additional questions or feedback we also invite you to contact us directly at support@tastytrade.com.

Thanks for being the most important part of the tastytrade community!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.