Key Takeaways
- Markets were buoyant on Thursday ahead of Friday’s triple-witching, which refers to the simultaneous expiration of stock options, index options, and index futures contracts.
- Triple-witching often results in greater trading volume and volatility, especially in the final hour of the session.
- 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.
Stocks rallied to record highs on Thursday ahead of one of Wall Street’s scariest-sounding events, set for Friday: a 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 on Wednesday cut interest rates by half a percentage point.
It was a bumpy ride to yesterday’s rate cut, with jitters about a weakening labor market and stretched tech valuations contributing to several big sell-offs in recent months. The Cboe Volatility Index (VIX), or “fear gauge,” stood at about 16.5 on Thursday, down from spikes in early August and September but still above its 2024 average.
What Triple-Witching Means for You
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.
But 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.
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.
