How to Play Upcoming Triple Witching Expiration Week

Straddles could be the best move next week

Senior Quantitative Analyst
Dec 6, 2023 at 8:00 AM
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Next Friday will be the third in December, meaning it will bring expiration week for equity options. Monthly expirations have become less significant due to weekly expiration dates for almost half of S&P 500 Index (SPX) stocks. December’s expiration week (along with March, June, and September) is unique, however, since it’s a triple witching expiration week.

Coinciding with equity options, contracts on stock index options and futures will also expire, potentially amplifying market volatility. Below, we will look at how the broader market has performed during those weeks.

What’s the Big Deal? 

The table below shows SPX weekly returns going back to 2017. Triple witching weeks have indeed been more volatile, showing a standard deviation of returns of 3.94% -- higher than other weekly returns.

Stock performance during triple witching weeks has been poor, with the SPX averaging a loss of 0.69%. During other expiration weeks (or the third Friday of the month that is not a triple witching week), the index is only about breakeven, with less than half of the returns positive. During non-expiration weeks, the SPX averaged a gain of 0.36%, with more than 60% of the returns positive. 

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Looking at more recent data shows expiration weeks have been especially awful. Since 2021, the SPX has been positive less than 30% of the time, averaging a loss of 0.71% in triple witching expiration weeks, and a loss of 0.51% in other expiration weeks.

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One way to take advantage of increased volatility next week would be to play options on the SPDR S&P 500 ETF Trust (SPY). The table below shows SPX return for each triple witching expiration week starting in 2021, and how SPY options would have performed each week.

For the option returns, it assumes purchasing an at-the-money option at the close on the Friday the week prior to triple witching expiration week. It also assumes the option was held until expiration and closed at intrinsic on expiration day.

Given the weakness on these days, just playing puts would have returned 58% per trade, with 55% of the returns positive. Meanwhile, calls would have lost 29% per trade. Playing straddles is a way to take market direction out of the equation, and bet simply on volatility. Straddles would have yielded 15% per trade, with six of 11 positive.

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What About Triple Witching Day?

I thought it would be interesting to see how stocks have done on triple witching day (expiration day of triple witching week). The table below summarizes SPX returns per day during triple witching week going back to 2021.

The week has tended to start off poor, move higher on Wednesday, then really tank the last two days of the week. Looking at triple witching day, over the past 11 triple witching weeks, Friday has averaged a loss of 0.59%, and was positive only two times out of 11 returns.

The returns during triple witching weeks and days could be random, but they are poor enough to make us wonder whether  or not something else is at play, and if this trend could continue.

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