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Key Takeaways
- The simultaneous expiration of three kinds of derivatives, known as triple-witching, could amplify volatility in financial markets on Friday.
- The final triple-witching of the year comes as market participants anxiously await a deal to keep the federal government funded past midnight.
- Buy-and-hold retail investors don’t have much to worry about with Friday’s volatility, but the event, especially the final hour of the day, could provide active traders with opportunities.
Stock traders and investors had a lot to be concerned about on Friday. Not only was the federal government flirting with a government shutdown on Saturday morning, but Wall Street also awaited triple-witching and its attendant volatility.
Triple-witching refers to the simultaneous expiration of stock options, index options, and index futures. It occurs four times a year, on the third Fridays of March, June, September, and December. Triple-witching usually triggers a flurry of activity as investors are forced to close out or extend their positions, and that activity can come with volatility.
Friday’s will be the final triple-witching of the year and it comes just days after the worst stock sell-off in months. The S&P 500 tumbled 3% on Wednesday after the Federal Reserve pared back its forecast for interest rate cuts next year, noting that the inflation outlook had become more uncertain in recent months.
Before Wednesday, stocks had been on a tear since Donald Trump was re-elected President last month. Stocks posted their biggest monthly gains of the year in November and continued to trade around record highs in the first half of December.
Index Rebalancings Also in Focus
Friday’s triple-witching will also coincide with the rebalancing of several major indexes, including the S&P 500 and the Nasdaq 100. Software company Workday (WDAY) and asset manager Apollo Global Management (APO) will replace tech hardware company Qorvo (QRVO) and engineering firm Amentum Holdings (AMTM) in the S&P 500 effective Monday morning.
AI darling Palantir Technologies (PLTR), Bitcoin proxy MicroStrategy (MSTR), and taser-maker Axon Enterprise (AXON) will replace biotech Illumina (ILMN), AI server maker Super Micro Computer (SMCI), and vaccine maker Moderna (MRNA) in the Nasdaq 100, also effective Monday. All of these stocks could see especially high volumes and volatility on Friday.
Buy-and-Hold Investors Need Not Worry
While triple-witching can prompt abnormal trading volume and some surprising price swings, buy-and-hold investors don’t have too much to worry about. Any volatility related to options and futures activity should be short-lived. Plus, Wall Street is aware that triple-witching comes with volatility, so unexpected price swings are unlikely to have much bearing on market sentiment.
Active traders have much more incentive to be paying attention today, and not only because they’re more likely than your average retail investor to own a contract that’s expiring. The final hour of the day, the triple-witching hour, can sometimes result in a less liquid market for certain securities. That can increase spreads and give savvy traders the opportunity to trade the same security at different prices across multiple markets, known as arbitrage.
