Triple Witching Signals Market Turning Point
CME: E-Mini S&P 500 Futures (
ES1!
)
Last Friday was the infamous “Triple Witching Day”, where US stock index futures, stock index options, and single-stock options contracts all expired on the same trading day. These phenomena happen only four times a year: on the third Friday of March, June, September, and December. In 2023, Triple Witching occurs on March 17th, June 16th, September 15th, and December 15th.
In folklore, the witching hour is a supernatural time of day when evil things may happen. Derivatives traders use this term to magnify the significance of options expiration. Hence the “Triple Witching Day”, and “Triple Witching Hour”, the last hour of trading on that day.
Understanding Triple Witching
A common expiration date for all three types of equities derivatives could cause increased trading volume and unusual price movements in both the derivatives contracts and the underlying equity assets.
Most traders seeking derivatives exposure are either hedgers or speculators. Speculators must offset their open positions prior to the end of triple witching hour. Hedgers, on the other hand, may want to maintain the hedging of their stock portfolio. They could close the existing futures or options positions and roll them out to the next contracts.
Some traders opened the contracts with the intention of buying the underlying securities. With any deliverable contract, the seller must deliver the underlying securities to the buyer when the futures contract expires, or if the options are exercised. Triple witching days could generate escalated trading activity and volatility.
Although much of the trading during triple witching is related to the squaring of positions, the surge in trading also drives price inefficiencies, which draws short-term arbitrageurs.
Traders with large short gamma positions are particularly exposed to price movements leading up to expiration. Arbitrageurs try to take advantage of such abnormal price action.
Triple Witching Day on Friday September 15th
US stocks fell last Friday as investors wrapped up a volatile week ahead of the Federal Reserve’s upcoming rate-setting meeting on September 19th-20th.
The Dow Jones Industrial Average slid 288.87 points, or -0.83%, to 34,618.24. At its lows, the index completely eliminated Thursday’s 332-point rally. The S&P 500 was lower by 1.22% to 4,450.32. And the Nasdaq Composite dropped 1.56% to 13,708.33.
In equity derivative market, I found that the high-volume day for CME E-Mini S&P 500 options on futures occurred on Thursday September 14th, the day before Triple Witching.
The E-Mini S&P options had a daily volume between 100K and 200K contracts from August to Mid-September. On September 14th, trade volume shot up 92% from the prior trading day to 441,871, and open interest gained 157,913 contracts to 2,459,599. Both trade volume and open interest fell back to normal levels on the next day.
This is evidence that traders planned their trades ahead of Triple Witching, so that they could avoid being squeezed on the last trading day and hours.
Triple Witching and Market Turning Points
Upon further review of the S&P price data, I found that Triple Witching Days in the past two years usually signaled a change in market directions. Following each of the seven such days under examination, the S&P moved up four times and moved down three times.
• 12/17/2021: Closed at 4,620. By March, it was 455 points lower, or -9.8% (Down)
• 03/18/2022: Closed at 4,463. It declined by 788 points or -17.7% by June (Down)
• 06/17/2022: Closed at 3,675. By August, it rose to 4,314, up 639 or +17.4% (Up)
• 09/16/2022: Closed at 3,873. It fell to 3,587 by October, down 286 or -7.4% (Down)
• 12/16/2022: Closed at 3,852. By February, it reached 4,193, up 341 or +8.8% (Up)
• 03/17/2023: Closed at 3,917. In the next 3 months, it rose 606 points, +15.5% (Up)
• 06/17/2023: Closed at 4,523. It moved up nearly 100 points, or 2.1% by August (Up)
A move by 7-18% in a short time span of three months is quite significant, statistically. The difficulty is to predict which way the S&P goes next, on the day of Triple Witching.
The S&P 500: From now till the next Triple Witching Day
On September 15th, the S&P 500 closed at 4,450. Where will the S&P be by December 15th, the next Triple Witching Day?
One hint could be found in the futures market. The December 2023 contract of E-Mini S&P 500 futures (ESU3) was settled at 4,498, down 4.8% from 4,675 reached on July 27th. March 2024 contract (ESH4) was settled at 4,549, down 4.0% from its recent high.
Our analysis from the last section shows that from one Triple Witching Day to the next, the S&P is more likely to make a big move than moving sideways.
The December futures price (4,498) is just 1.1% above the cash index (4,450). Would there be a misprice? If the market follows similar patterns from the past two years, we could expect the S&P to go up to 4,800 (+8%), or down to 4,100 (-8%) by December.
In my opinion, the S&P faces significant headwind, after running up 20% from its October low. Here are the top-3 that come to mind:
• US CPI has rebounded, from 3.0% in June, to 3.2% in July, and 3.7% in August. The government narrative of inflation getting under control is starting to unravel.
• The rise in energy and shelter cost will spill over to household cost-of-living and business operating cost. On the one hand, it raises the final price of good and service; on the other, it reduces consumer dispensable income available for other purchases.
• According to the Fed, consumer credit card debt hit $1 trillion in Q2. Total student loans outstanding reached $1.78 trillion in Q1. High credit card interest rates and the resumption of student loan repayments will squeeze consumer budget.
The Fed would face a difficult decision this week as it debates whether to raise interest rate or pause for the time being.
In my view, the Fed is not done with its monetary tightening policy. Even if it holds rate unchanged for now, it could still raise it again in November or December meeting. The overheated inflation data just makes the Fed unlikely to call it a victory after 11 rate hikes.
The remaining Fed meetings in 2023, September 20th, November 1st, and December 13th, all holding before the December Triple Witch Day. If the Fed turns out to be less accommodating than the market expects, the S&P could go further down.
Each E-Mini S&P 500 futures contract is notional on $50 times the index. At Friday closing price of 4,498, one December contract is valued at $224,900. When the index moves 1 point, the futures account would gain or lose $50. Buying or selling one contract requires an initial margin of $11,200.
Alternatively, investors could consider the Micro S&P 500 (
MES
). It is 1/10th of the E-Mini contract and requires a margin of $1,120. When the index moves 1 point, the futures account would gain or lose $5.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
ES1!
) Last Friday was the infamous “Triple Witching Day”, where US stock index futures, stock index options, and single-stock options contracts all expired on the same trading day. These phenomena happen only four times a year: on the third Friday of March, June, September, and December. In 2023, Triple Witching occurs on March 17th, June 16th, September 15th, and December 15th.
In folklore, the witching hour is a supernatural time of day when evil things may happen. Derivatives traders use this term to magnify the significance of options expiration. Hence the “Triple Witching Day”, and “Triple Witching Hour”, the last hour of trading on that day.
Understanding Triple Witching
A common expiration date for all three types of equities derivatives could cause increased trading volume and unusual price movements in both the derivatives contracts and the underlying equity assets.
Most traders seeking derivatives exposure are either hedgers or speculators. Speculators must offset their open positions prior to the end of triple witching hour. Hedgers, on the other hand, may want to maintain the hedging of their stock portfolio. They could close the existing futures or options positions and roll them out to the next contracts.
Some traders opened the contracts with the intention of buying the underlying securities. With any deliverable contract, the seller must deliver the underlying securities to the buyer when the futures contract expires, or if the options are exercised. Triple witching days could generate escalated trading activity and volatility.
Although much of the trading during triple witching is related to the squaring of positions, the surge in trading also drives price inefficiencies, which draws short-term arbitrageurs.
Traders with large short gamma positions are particularly exposed to price movements leading up to expiration. Arbitrageurs try to take advantage of such abnormal price action.
Triple Witching Day on Friday September 15th
US stocks fell last Friday as investors wrapped up a volatile week ahead of the Federal Reserve’s upcoming rate-setting meeting on September 19th-20th.
The Dow Jones Industrial Average slid 288.87 points, or -0.83%, to 34,618.24. At its lows, the index completely eliminated Thursday’s 332-point rally. The S&P 500 was lower by 1.22% to 4,450.32. And the Nasdaq Composite dropped 1.56% to 13,708.33.
In equity derivative market, I found that the high-volume day for CME E-Mini S&P 500 options on futures occurred on Thursday September 14th, the day before Triple Witching.
The E-Mini S&P options had a daily volume between 100K and 200K contracts from August to Mid-September. On September 14th, trade volume shot up 92% from the prior trading day to 441,871, and open interest gained 157,913 contracts to 2,459,599. Both trade volume and open interest fell back to normal levels on the next day.
This is evidence that traders planned their trades ahead of Triple Witching, so that they could avoid being squeezed on the last trading day and hours.
Triple Witching and Market Turning Points
Upon further review of the S&P price data, I found that Triple Witching Days in the past two years usually signaled a change in market directions. Following each of the seven such days under examination, the S&P moved up four times and moved down three times.
• 12/17/2021: Closed at 4,620. By March, it was 455 points lower, or -9.8% (Down)
• 03/18/2022: Closed at 4,463. It declined by 788 points or -17.7% by June (Down)
• 06/17/2022: Closed at 3,675. By August, it rose to 4,314, up 639 or +17.4% (Up)
• 09/16/2022: Closed at 3,873. It fell to 3,587 by October, down 286 or -7.4% (Down)
• 12/16/2022: Closed at 3,852. By February, it reached 4,193, up 341 or +8.8% (Up)
• 03/17/2023: Closed at 3,917. In the next 3 months, it rose 606 points, +15.5% (Up)
• 06/17/2023: Closed at 4,523. It moved up nearly 100 points, or 2.1% by August (Up)
A move by 7-18% in a short time span of three months is quite significant, statistically. The difficulty is to predict which way the S&P goes next, on the day of Triple Witching.
The S&P 500: From now till the next Triple Witching Day
On September 15th, the S&P 500 closed at 4,450. Where will the S&P be by December 15th, the next Triple Witching Day?
One hint could be found in the futures market. The December 2023 contract of E-Mini S&P 500 futures (ESU3) was settled at 4,498, down 4.8% from 4,675 reached on July 27th. March 2024 contract (ESH4) was settled at 4,549, down 4.0% from its recent high.
Our analysis from the last section shows that from one Triple Witching Day to the next, the S&P is more likely to make a big move than moving sideways.
The December futures price (4,498) is just 1.1% above the cash index (4,450). Would there be a misprice? If the market follows similar patterns from the past two years, we could expect the S&P to go up to 4,800 (+8%), or down to 4,100 (-8%) by December.
In my opinion, the S&P faces significant headwind, after running up 20% from its October low. Here are the top-3 that come to mind:
• US CPI has rebounded, from 3.0% in June, to 3.2% in July, and 3.7% in August. The government narrative of inflation getting under control is starting to unravel.
• The rise in energy and shelter cost will spill over to household cost-of-living and business operating cost. On the one hand, it raises the final price of good and service; on the other, it reduces consumer dispensable income available for other purchases.
• According to the Fed, consumer credit card debt hit $1 trillion in Q2. Total student loans outstanding reached $1.78 trillion in Q1. High credit card interest rates and the resumption of student loan repayments will squeeze consumer budget.
The Fed would face a difficult decision this week as it debates whether to raise interest rate or pause for the time being.
In my view, the Fed is not done with its monetary tightening policy. Even if it holds rate unchanged for now, it could still raise it again in November or December meeting. The overheated inflation data just makes the Fed unlikely to call it a victory after 11 rate hikes.
The remaining Fed meetings in 2023, September 20th, November 1st, and December 13th, all holding before the December Triple Witch Day. If the Fed turns out to be less accommodating than the market expects, the S&P could go further down.
Each E-Mini S&P 500 futures contract is notional on $50 times the index. At Friday closing price of 4,498, one December contract is valued at $224,900. When the index moves 1 point, the futures account would gain or lose $50. Buying or selling one contract requires an initial margin of $11,200.
Alternatively, investors could consider the Micro S&P 500 (
MES
). It is 1/10th of the E-Mini contract and requires a margin of $1,120. When the index moves 1 point, the futures account would gain or lose $5. Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
Jim W. Huang, CFA
jimwenhuang@gmail.com
jimwenhuang@gmail.com
