What a triple witching day means for markets

Wall Street is bracing for a triple witching, which could cause market volatility. Yahoo Finance’s Julie Hyman joins Wealth! to explain the term and what it could mean for your portfolio.

Triple witching is the expiration of different types of contracts, such as stock options, stock index futures, and stock index options contracts. This occurs on a quarterly basis on the third Friday of the month.

According to various estimates, the market could see $4.8 trillion to $5.5 trillion worth of contracts expiring in the day’s session, causing a significant uptick in volume. However, individual investors not involved in the options market should remain largely unaffected.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

This post was written by Melanie Riehl

Video Transcript

Our top story today for the markets.

Wall Street racing for a triple witching here to explain what that is and whether or not it affects your portfolio.

We’ve got Yahoo Finance’s market domination.

Co anchor Julie Hyman.

Hey, Julie.

Hey, Brad.

Well, witching sounds spooky, right?

Um, and that’s because it is named after the sort of witching hour, the wee hours of the night when no good things happen.

But in this case, it’s not very scary, right?

So let’s get to what triple witching is here.

It’s the expiration of different types of contracts here.

So triple witching, which we have today.

You see the expiration of stock options, contracts, stock index futures contracts and stock index options contracts we used to have quadruple witching, which was also stock options futures contracts.

But those don’t really trade in the US anymore.

Now this happens on the third Friday of every month where you just get the stock options, and then we get the triple on a quarterly basis on the third Friday of the month.

So that is what is happening today, and according to various estimates, we could get anywhere from 4.8 to $5.5 trillion worth of these types of contracts that are expiring today.

So let’s dig a little bit more into it by looking at a real world example of one of these contracts invidia NVIDIA the second most act within this universe of these options contracts here.

And so there’s a lot of open interest that is open contracts.

Here, uh, on NVIDIA.

This is just one that we pick that’s expiring today.

This is the $140 call option.

A lot of open interest and more than 145,000 contracts.

Here.

You could last buy this the last time we checked for two cents.

So for two cents, you have the right to then take possession of 100 of these NVIDIA shares at $140.

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However, if by the last tick of the day today the stock is not at $140 and at last check it wasn’t.

In fact, yesterday we saw it reach 100 and $40 and then back off from that level.

Then this This expires and you get nothing.

It’s worthless.

However, if by some chance the stock rose to $140.

Today, you sell this contract potentially a profit, or you would take delivery of those.

All of this is a complicated way of saying that when people are making these various option buys and trades that it creates a lot of offsetting moves in the market.

Either you take delivery of the shares, and that creates an uptick in volume in the market.

Or maybe you’re doing an offsetting trade over there, which also creates more volume in the market.

So all of this is to say, you see a big uptick in volume on a day like this.

Not necessarily volatility, maybe a little bit of volatility at the margins in an individual stock.

But overall, a big uptick in volume overall on the market today between these index options and futures and then the individual stock options.

So, Brad, what is the bottom line for you, the individual investor today?

If you’re not in the options market, probably not much.

And if you’re not a professional investor, probably not much so that’s something to keep in mind.

You might hear a lot of discussion about which the effect it has here, but for most sort of long investors, most everyday investors who have your money in your 401k and you’re not doing a lot of individual day trading.

There’s not necessarily going to be a big impact for you, all right.

No sorcery, just portfolio and options strategy here.

Thanks so much, Julie.

Appreciate it.