Triple-Witch Says, “Remember Me?”

For a good portion of my life, I avoided taking vacation days on the third Friday of a month.  Options expired on a monthly basis, typically on those third Fridays, and the concentration of expiring options had the potential to increase volatility, both in the market as a whole and for our proprietary positions.  And in the last month of each quarter, those expirations were even more critical – the unpredictability of quarterly expirations led to the nickname of “triple witching” days.[i]
Then and now, quarterly expirations are when stock index futures and options join equity options in ending their lifespans.  Index futures still expire on a quarterly basis, but the character of monthly expirations began to change after weekly options were listed in 2005.  Because only the most actively traded options classes justified weekly expirations, much of the volume shifted into these shorter-dated products, reducing the relative importance of monthly expirations.  When Wednesday, and later Monday, expirations for key indices and ETFs were introduced in 2016, few seemed to notice, or even care.  But a few months after the expiration week was completed in 2022, much of the focus in the options trading world shifted to the so-called “zero-dated”, or “0DTE” options.  But even with nearly constant expirations, there are still some special reasons for traders to focus on the more significant expiration days.
Specifically, there are four key things to watch for on triple witch days.  The first two apply to monthly expirations as well; the latter two apply only to quarterlies:
AM-expiring options.  The thing that differentiates monthly (including quarterly) expirations from the routine weekly and now daily is the presence of key index options that expire on the open, not the close.  They are cash settled, so any residual delta evaporates on the open, making them trickier to hedge.  If there are a lot of expiring contracts near the money, that can give us huge swings as hedgers try to stay as flat as possible.  Quite frankly, expiring index options had little influence on this morning’s open.  After yesterday's rally, we’d outkicked the open interest.  There simply weren’t many AM expiring contracts near the money today, and since it’s safe to assume that the bulk of the other contracts had already been hedged, pre-market futures were relatively stable this morning.
All equity and ETF classes have some expiring options.   As noted above, most of the action occurs in classes with weekly and daily expiries, but this doesn’t remove the importance of major expirations from consideration.  There is still plenty of activity clustered around monthly expirations – those options get listed months before weeklies and dailies – so there is a surfeit of options, many of which can be deeply in- or out-of-the-money.  Many of those options need to be rolled in the days or hours preceding a monthly expiry
Futures expiring.  This can be a problem when there are extreme dislocations in the market (think March 2020), but under normal circumstances the vast majority of expiring contracts that have not already been liquidated have been rolled or otherwise hedged, so that typically doesn’t offer major fireworks.
Index rebalancing.  This is the one to watch today.  DELL, Palantir (PLTR), and Erie Indemnity (ERIE) are going in, replacing American Airlines (AAL), ETSY, and Bio-Rad Laboratories (BIO).  Furthermore, in a strange quirk, Apple (AAPL) is getting its weight increased.  Berkshire Hathaway’s (BRK.B) stake was excluded from the stock’s free float; BRK’s recent sale increased the amount of stock available in the index calculation.  That’s a lot of money flowing into those names, meaning that a similar amount will need to flow out of the otherwise unaffected names.  Remember, if you manage an index fund and have a stable amount of funds, the money needed to buy the new stock has to come from somewhere.  If the money raised from selling the outgoing names is insufficient to pay for the incoming names, the fund must sell pieces of its other holdings to keep the necessary index balance.  The money flowing out will be well dispersed (except for the three that are leaving), but it could lead to an unexpectedly large, across the board sell basket on the close.
                                                                                                          
It is impossible to know in advance if any of these factors, including the rebalancing, will have a marked effect on trading this afternoon – especially after yesterday's ferocious rally.  But at least for this “triple-witch” expiration, we need to pay attention to the likelihood that it could influence market activity after a consequential week.


[i] From 2001-2020, when single-stock futures traded in the US, “triple-witching” became “quadruple-witching”.  When the OneChicago exchange closed, the nomenclature reverted to “triple-witching.”