MARKET History

The S&P Witch Project

“Triple-witching” days — when stock options, and index futures and options
expire simultaneously — often make headlines, but traders should carefully
watch all expiration days. Find out how the S&P 500 behaves around futures
and options expiration.

BY DAVID BUKEY

I t’s been more than 20 years since the Chicago Mercantile

exchange (CME) launched its S&P 500 (SP) futures and
options, but traders still seem puzzled about the effects
of “triple-witching” expiration days — the two-day
periods in March, June, September and December when stock-
index futures, stock index futures options and equity options
expire on the same day. The general consensus is, the only
occurred around the same time as the other three instruments.
(For more information regarding specific contracts’ expiration
dates, see “Expiration details.”)
All four contracts end on the third Thursday and Friday of
each quarter. At this point, traders must roll contracts forward,
close their positions or let them expire.
Because these quarterly events bring higher volume and
thing you can expect is the unexpected. seemingly higher volatility, it’s not surprising the financial
With the introduction of single-stock futures contracts in media watches both days closely. However, there is no solid
November 2002, triple witching became “quadruple witch- evidence triple-witching days cause unique daily price moves.
ing,” as the last trading day for these new futures contracts Gary J. Santoni, professor of economics at Ball State
University, notes the S&P 500 hasn’t
FIGURE 1 S&P 500 PERFORMANCE SURROUNDING ALL STOCK INDEX FUTURES AND posted significantly larger average
OPTIONS EXPIRATIONS (1982 TO 2004) daily moves (up or down) during
triple-witching Fridays compared to
The market posted small, but consistent, gains in the week preceding futures and
regular days. In fact, Santoni states
options expiration. The final Thursdays and Fridays of these weeks (Day -1 and 1) were
his rese arch is “inconsistent with the
surprisingly quiet. However, the S&P dropped sharply the Monday after expiration.
claims of critics that stock prices are
more volatile on days when futures
Futures and options contracts are settled.” (To read
expiration Santoni’s article “Index arbitrage
0.03 Benchmark and stock market volatility,” visit
0.02 www.cme.com/files/indexarb.pdf.)
We analyzed S&P 500 daily mar-
0.01
ket behavior surrounding all quar-
0 terly triple-witching days as well as
its price action around other con-
-0.01 tracts’ last trading day, or the third
-0.02 Friday of each “serial” month (e.g.,
non-quarterly months, such as
-0.03 January, February, April, May, etc.),
Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day
-8 -7 -6 -5 -4 -3 -2 -1* 1** 2 3 4 5 6 7 8 to see how futures and options
Days before and after expiration expirations affected the market.
* Last trading day — futures and options (quarterly months) Overall, the S&P’s performance
**Expiration day — futures and options (quarterly months) and last trading day (serial months); these options expire the next day (Saturday)
on the third Thursday and Friday
of both triple-witching and serial

82 www.activetradermag.com • December 2004 • ACTIVE TRADER

 Expiration details

months was unremarkable. Each month, the market rose in the
third expiration week and fell in the fourth, on average.
However, the most interesting behavior was associated with
serial-month expiration periods, not triple-witching dates.
Futures and options expiration: 1982 to 2004
To see how the market behaved surrounding futures and
options expirations, we studied daily S&P 500 price moves
prior to and following all 89 quarterly triple-witching days,
starting with the CME’s first S&P 500 futures contract, which
expired on June 18, 1982, and finishing with June 18, 2004. We
also measured daily market performance before and after the
expiration of all 173 serial-month options on S&P futures con-
tracts from their inception on Jan. 28, 1983. to Aug. 20, 2004.
The analysis window spans 16 days: eight days preceding
expiration Friday and the eight days following it, which
includes the day itself.
Figure 1 shows the S&P500’s daily average gains and losses
before and after the 262 futures and options expiration dates
over the past 22 years. Day -1 is the final Thursday of each con-
tract — the last trading day for S&Pfutures and quarterly stock
index options. Day 1 represents the final Friday, or the last
trading day for stock options, serial-month stock index options
and single-stock futures (as well as the latter two instruments’
expiration days).
The figure also compares each day’s price move to its bench-
mark, or typical 0.05-percent daily price move during this peri-
od. The market seems stagnant prior to expiration, as it out-
performed its benchmark just half the time and moved 0.10
percent or more on only three of the eight days. However, the
S&P posted small, consecutive gains on the five days prior to
expiration, an average 0.49-percent gain over that period.
continued on p. 84
S
tock-index futures such as the S&P 500 (SP),
Nasdaq 100 (ND) and their E-mini counterparts
(ES and NQ, respectively) trade for three
months until the third Thursday before the end of
each quarter. These futures settle to the cash index
at a special opening quotation (SOQ) on Friday morn-
ing and then expire. Friday’s final settlement price is
based on each index component’s opening price (or
previous closing price if a stock never trades that
day).
The CME began using the SOQ settlement method
with its June 1987 contract to minimize the volatili-
ty that occurred as traders rushed to place closing
trades for stock index futures and their options on
Thursday. Prior to June 1987, stock index futures set-
tled to Thursday’s close.
Monthly stock options and single-stock futures
have a different expiration schedule. The third
Friday of each month is the last trading day for these
contracts; stock options expire on Saturday, and sin-
gle-stock futures expire at 10 a.m. (ET) the following
business day (usually Monday).
However, options on stock index futures have dif-
ferent expiration dates, depending on the contract
month. For example, options on S&P 500 and Nasdaq
100 futures follow the same schedule as the con-
tracts on which they’re based during the quarterly
months (March, June, September and December) and
end on Thursday. But in serial months, or the eight
remaining months of the year, options on stock index
futures end on Friday, as monthly stock options and
single-stock futures do.

TABLE 1 DAILY MOVES SURROUNDING EXPIRATION: SERIAL MONTH VS. QUARTERLY TRIPLE WITCHING (1982 TO 2004)
The S&P gained more in the week before serial-month expirations than it did before triple-witching expirations and fell
further the following Monday (Day 2).
Close Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day
location: -8 -7 -6 -5 -4 -3 -2 -1* 1** 2 3 4 5 6 7 8
Serial-month option expirations (173 instances)
Average: 56.89 0.02% -0.08% 0.10% 0.09% 0.23% 0.13% 0.08% 0.11% -0.10% -0.29% 0.04% 0.21% -0.08% -0.02% 0.02% 0.19%
Median: 60.27 -0.02% -0.05% 0.08% 0.24% 0.18% 0.14% 0.08% 0.06% 0.02% -0.20% 0.06% 0.11% 0.00% 0.05% 0.03% 0.16%
Pct. > 0: 47.40% 46.24% 52.60% 59.54% 64.74% 54.34% 55.49% 56.65% 52.02% 40.46% 54.34% 58.96% 49.71% 51.45% 50.87% 60.69%

Triple-witching expirations (89 instances)

Avg: 61.07 0.05% -0.07% -0.27% 0.11% 0.10% 0.11% -0.05% -0.06% 0.12% -0.08% 0.07% 0.07% 0.01% -0.05% 0.05% 0.13%
Med: 68.14 -0.17% -0.01% -0.15% 0.16% 0.10% 0.09% -0.02% 0.04% 0.16% -0.08% 0.06% 0.03% 0.02% -0.04% 0.09% 0.04%
Pct. > 0: 41.57% 49.44% 41.57% 55.06% 58.43% 51.69% 47.19% 53.93% 60.67% 40.45% 51.69% 50.56% 52.81% 44.94% 55.06% 53.93%
1-day average price move 0.05%
* Last trading day — futures and options (quarterly months)
**Expiration day — futures and options (quarterly months) and last trading day (serial months); these options expire the next day (Saturday)

ACTIVE TRADER • December 2004 • www.activetradermag.com 83

 FIGURE 2 EXPIRATION DAYS: SERIAL MONTHS VS. TRIPLE WITCHING
The market drifted sideways
during the final two days of The S&P moved more dramatically before and after serial-month expirations than
futures and options contracts around quarterly triple-witching expirations. The S&P sank an average of -0.29 per -
(Day -1 and 1, respectively) and cent the Monday after serial-month expiration.
plunged an average 0.22 percent
Serial months
on the following Monday, or the only (173 instances)
second day following expira- Triple witching only
tion. The market rebounded two 0.03 (89 instances)
days later, but it then treaded 0.02
water towards the end of that 0.01
week.
0
Serial-month vs. triple-witching -0.01
expiration -0.02
Table 1 (p. 83) breaks down the
-0.03
S&P’s daily performance into
serial-month and triple-witching -0.04 Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day
expirations. The table compares -8 -7 -6 -5 -4 -3 -2 -1* 1** 2 3 4 5 6 7 8
each category’s average and Days before and after expiration
median price moves. Notable * Last trading day — futures and options (quarterly months)
**Expiration day — futures and options (quarterly months) and last trading day (serial months); these options expire the next day (Saturday)
differences between the num-
bers suggest the average has
been distorted by a few extreme-
ly large or small values, which means the median is likely more instance, if the market closed at the midpoint between the
representative of the day’s typical move. (For details regarding intraday high and low, its close location equals 50; extreme
these statistics, see “Average and median,” p. 85.) closes are 100 and 0, respectively.
The first column shows the S&P’s average close location The remaining 16 columns represent the average daily gains
within the daily range on the contracts’ final Friday. For and losses for the eight days leading up to the final Friday (i.e.,
expiration of the quarterly S&P futures and options) and the
eight days following it. Each category’s final row shows the
FIGURE 3 AVERAGE WEEKLY S&P 500 MOVES: day’s percentage of positive moves.
EXPIRATION VS. FOLLOWING WEEK The index tended to climb higher in the days prior to serial-
month expirations, and posted six consecutive daily gains
The market rose the week futures and options expired from the sixth day to the final day preceding the event, a 0.74-
and sold off following expiration. Serial-month expira - percent average gain for this six-day period. The market then
tion is the best example of this pattern: The S&P sold off on expiration day and the following Monday.
climbed an average 0.45 percent during expiration and In fact, the second day after serial-month expirations
dropped 0.16 percent the succeeding week. However, the marked the largest daily market move (-0.29 percent) in the
S&P performed in line with its weekly benchmark price table. While the S&P regained some of its prior losses on the
move during quarterly triple witching. fourth day, the market drifted towards the end of the first week
before rising again on the eighth day.
Market behavior surrounding triple-witching expiration
Expiration week days was less dramatic. The S&Pmoved less than 0.15 percent,
0.63 on average, in 15 of the 16 days in the table. The one exception
Succeeding week to this rule occurred on the sixth day before triple-witching
0.45% day when the market sank 0.27 percent.
0.42 0.37% Triple-witching market moves were also less consistent: The
market rallied moderately and beat its daily benchmark from
0.23% 0.22%
0.21
the fifth day to the third day prior to triple witching. The S&P
also gained ground on expiration day and towards the end of
the following week, but these periods were brief and are less
0.01%
0.00 compelling than serial-month-expiration patterns.

-0.11% Serial-month patterns

-0.16%
-0.21 Figure 2 shows the average daily S&Pperformance before and
Serial-month Overall Benchmark Quarterly triple
expiration expiration witching after both serial-month and triple-witching expiration. The dif-
Expiration type ferences between the two expiration types are significant: The
S&P’s average daily price swings (up or down) are not only
larger surrounding serial-month expirations, they also are

84 www.activetradermag.com • December 2004 • ACTIVE TRADER

 Average and median

T
more reliable than their triple-witching counterparts since
they’re based on nearly twice as many observations (173 vs. 89 he average (or mean) of a set of values is the
instances). sum of the values divided by the number of
The figure highlights the same pattern surrounding serial values in the set. To calculate the average of
months that appeared in Table 1: bullish before expiration, fol- a set of 8 numbers, add them and divide by 8.
lowed by a brief market swoon and subsequent rebound. In However, extremely large or small values can dis-
contrast, the market didn’t significantly anticipate or react to tort a set’s average. For example, the average of 23,
triple-witching expirations (at least on a daily basis). 24, 25, 26, 27, 28, 29, 99 is 35.13 (281/8). But if you
remove the last value, the average is 26, a number
Weekly averages more typical of the majority of values in the data
Figure 3 compares the S&P’s average performance during expi- set.
ration week to the week following it and breaks down these The median is the middle value in a data set when
differences into four categories: overall, serial-month and the set has an odd number of values and the average
triple-witching expirations as well as the weekly benchmark, of the two middle values when the set has an even
or typical five-day average S&P move over the past 22 years. number of values. Unlike the average, a median is
The figure confirms that the market tended to rally during less likely to be skewed by a small number of non-
expiration week and decline in the wake of expiration. Again, representative numbers in a data set. The median in
serial-month expirations are the best examples of this pattern. the prior example is 26.5, which is more representa-
The S&P climbed an average 0.45 percent in expiration weeks tive of the data set than the average (35.13).
when triple witching did not occur and
sold off 0.16 percent in the succeeding
week. FIGURE 4 FINAL FRIDAY EXTREME CLOSES
However, as previous figures and
tables suggest, triple-witching weeks The S&P failed to continue its rally following strong closes. While the market
were nothing unusual and performed in dropped the day after weak closes, it regained ground on the third and
line with the benchmark. Also, the S&P fourth days.
was flat following these quarterly events.
Strong close
Extreme closes
1.00 Weak close
Days on which the market closes at
0.75 All instances
extremely high or low levels can some-
times lead to a continuation or reversal of 0.50
this initial thrust. Figure 4 shows the 0.25
average daily S&Pperformance of all 262 0.00
final Fridays and compares it to market -0.25
behavior after strong and weak closes, -0.50
defined as Fridays that closed within the -0.75
upper and lower 20 percent of their -1.00
range, respectively. -1.25
The figure also shows how the market -1.50
fared in the subsequent seven days and Day 1* Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8
shows that strong closes didn’t lead to Days after triple witching (Day 1 = expiration day)
further gains, but weak closes did trigger *Expiration day — futures and options (quarterly months) and last trading day (serial months);
additional short-term weakness. Though these options expire the next day (Saturday)
strong-close average gains were 0.75 per-
cent on the final Friday, the market didn’t
budge on the second day. Also, the remaining six days follow- expirations, its behavior following weak closes intensified.
ing strong closes lacked clear trends. Comparing Figure 4’s overall weak-close average loss on the
However, weak closes added to their 1.26-percent average second day to Figure 5’s serial-month counterpart (-0.61 and
loss by sinking 0.61 percent the next day. This pattern then –1.05 percent, respectively) shows that sharper drops tend to
reversed on the third and fourth days as the S&Prallied slight- follow weaker closes in serial months, not after quarterly
ly before drifting sideways and climbing towards the end of triple-witching ones (not shown).
our analysis window. The market reversal that appeared on the third and fourth
To find out whether these tendencies differed following seri- days after all weak closes is more abrupt after serial expira-
al-month and triple-witching expirations, we broke out strong tions. For example, the market rebounded an average 0.16 and
and weak closes by expiration type. Figure 5 (p. 86) shows how 0.34 percent, respectively, on those days following all final
the market reacted to strong and weak closes on the last trad- Fridays, yet it snapped back 0.31 and 0.62 percent, respective-
ing day of serial-month contracts. Though the S&P’s lackluster ly, after serial-month expirations.
response to strong closes also appeared after serial-month continued on p. 86

ACTIVE TRADER • December 2004 • www.activetradermag.com 85

 FIGURE 5 SERIAL MONTH EXTREME CLOSES

The market fell an average of -1.05 percent on Mondays after serial month
last trading days (Day 2). The S&P then bounced back on the third and fourth the market as much as one would think.
days. Also, this discussion doesn’t address
intraday S&P 500 price action on futures
and options contracts’ last trading day or
Strong close
expiration day.
Weak close
These figures suggest many trading
1.00 All serial-month
opportunities, though none of them
0.75 option expirations
involve being in the market during the
0.50
last trading day or expiration day.
0.25
Instead, Figure 2 indicates the best one-
0.00
day trade is to sell the S&P short at the
-0.25 close of the last trading day of serial-
-0.50 month contracts (Day 1) and exit the
-0.75 trade one day later. This trade should be
-1.00 more profitable if the S&P closes in the
-1.25 lower 20 percent of its range that day.
-1.50 Traders looking for a longer-term
Day 1* Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8
Days after triple witching (Day 1 = expiration day) trade should go long on the sixth day
before serial-month expiration and exit at
*Expiration day — futures and options (quarterly months) and last trading day (serial months);
these options expire the next day (Saturday) the close immediately prior to the last
trading day.
While these tendencies are based on a
reasonable number of occurrences, it’s
Conclusion wise to trade them only if they correspond with other trading
The analysis presented here seems to contradict conventional signals.Ý
wisdom that triple witching is quite volatile. This is in line with
previous research that has shown triple witching doesn’t affect Kesha Green contributed to this article.

86 www.activetradermag.com • December 2004 • ACTIVE TRADER