Triple Witching Day

Four times a year, each Friday, share prices seem to jump up and down in an uncontrolled manner. This is due neither to news from companies nor to the state of the economy. The so-called Triple Witching Day, which is also known as the triple expiration day, causes price movements on the stock exchange.

The prices on the Triple Witching Day are a plaything of the professionals. For it is not the share prices themselves that determine the prices of derivatives such as futures and options, but vice versa. Anyone who holds positions in futures or options tries to manipulate the price of a stock by buying or selling the underlying asset, usually a stock. Share prices are moved by traders and investment banks who want to maximize their profits when trading futures or options or limit losses.

Futures and options with last breath

The “Great Expiry Day” or “Triple Witching Day” is always the third Friday of March, June, September and December. On this date, three categories of derivatives expire on the Eurex derivatives exchange. At 12 noon, the futures and options on the European Stoxx indices expire, one hour later, the futures and options on the Dax and TecDax expire. The futures and options on the MDax will also be due at 1:05 pm. At the end of electronic Xetra trading at 17:30, the options on individual stocks are finally settled.

This meeting takes place only four times a year. While options on stocks and indices expire monthly, futures only expire every three months.

The settlement, i.e. the price-fixing at the end of the term, decides for investors in futures or options whether their commitment was successful. Anyone who has purchased a Dax option with a strike price of 10,000, for example, is naturally interested in the Dax closing at settlement above this level. Accordingly, it can try to buy shares with a high weighting in the Dax to raise the index as a whole. Heavyweights such as Siemens, Deutsche Telekom or Daimler are naturally best suited for that.

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Private investors need to be very cautious

Conversely, short selling in equities can make sense for investors who want to move the index south to make as much capital as possible from their derivative transactions. These investors have previously bet on falling index levels via put purchases of options or short sales of futures.

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Accordingly, price movements are hectic and uncontrolled and regularly run on Triple Witching Day, depending on who has the upper hand in the game of forces.

For private investors, exposures on these trading days are associated with special risks. Less “normal” news or chart technical trends determine what happens. The focus is on the number of open positions, known as “open interest”, which are to be closed quickly before the derivatives expire. Rapid price movements in equities with high turnover are therefore often not what they seem – for example, the beginning of a new trend. Anyone who gets involved in the dangerous game with the professionals on the Triple Witches Day should, therefore, be aware of the risks and side effects.

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