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Trading Strategies
How to Trade Triple Witching
Last Updated on January 26, 2023 by Mark Ursell
This article shows the best way to trade Triple Witching. Learn how to avoid the dangers and maximize the opportunities around Triple Witching.
Read on if you want to:
- Avoid Triple Witching volatility by going To cash
- Trade long-short around Triple Witching
- Maximize your potential gain with leveraged ETFs around Triple Witching
- Learn Three Different Trading Strategies and see the backtested results using the SPY, QQQ and SQQQ.
Many traders are nervous about triple witching, but with the information in this article, you will be able to minimize your risk and increase your profits.
Table of Contents
What is Triple Witching? And How Does it Affect Stocks?
Triple Witching is a market phenomenon that happens four times every year. On the third Friday of March, June, September and December.
This date is when quarterly stock options, stock index options and stock index futures expire at the same time.
Triple Witching tends to have above-average market volume and volatility – in particular during the last hour of Friday trading.
Triple witching often interrupts the trend, and it can take a while to resume.
Watch the Video To See Me Explain
How Can Stock Traders Avoid Triple Witching Volatility?
Long-only traders and active investors can avoid triple witching by going to cash in all or part of their portfolio around the time of triple witching. Historically this has tended to be a period of market weakness.
How Can I Trade Triple Witching?
Triple Witching has historically given provides some excellent short trading opportunities. During the last 11 years of (mostly) bull market, the days around triple witching have tended to fall.
Trading Strategy Analysis
I have backtested three different trading strategies.
I have tested these strategies on the SPY, QQQ and SQQQ. I do all my analysis in Excel and you can see the results of each trading strategy compared to the underlying instrument.
Long Only – Avoid Triple Witching Strategy
Firstly, lets have a look at the SPY over the past 11 years since 2010.
Rules
The simplest thing for long traders and investors is to avoid triple witching. For this basic scenario, I did the following:
- Enter long on the next trading day after Triple Witching
- Go to cash at the close on Thursday before Triple Witching
- Re-enter long on the next trading day after Triple Witching
Results
You can compare the net profit, compound annual growth rate (CAGR), max drawdown and MAR ratio. You will see that avoiding triple witching has improved performance compared to buy and hold.
| Metric | Avoiding Triple Witching | Underlying Market |
|---|---|---|
| Gross Winning Trades | $596,676 | |
| Gross Losing Trades | $-168,389 | |
| Net Profit | $428,287 | $347,874 |
| Profit Factor | 3.54 | |
| Winning Trades | 37 | |
| Losing Trades | 8 | |
| Breakeven Trades | 0 | |
| Percentage Winning Trades | 82% | |
| CAGR | 15.9% | 14.2% |
| Max Drawdown | 29.4% | 33.8% |
| MAR Ratio (CAGR/Max DD) | 0.54 | 0.42 |
Long/Short – Trade Triple Witching Strategy
Next, I tested QQQ over the same time period. This time using a profit target and stops. The intention is to have a tradable strategy with lower drawdown and a higher MAR ratio than the underlying instrument.
Rules
- Enter long on the next trading day after Triple Witching
- Go short at the close on Thursday before Triple Witching
- Re-enter long on the next trading day after Triple Witching
- Profit Target – 50%
- Stop-loss – 8%
- Trailing Stop Loss (chandelier exit) – 8%
Results
| Metrics | Avoiding Triple Witching | Underlying Market |
|---|---|---|
| Gross Winning Trades | $738,912 | |
| Gross Losing Trades | $-156,438 | |
| Net Profit | $582,474 | $699,084 |
| Profit Factor | 4.72 | |
| Winning Trades | 55 | |
| Losing Trades | 35 | |
| Breakeven Trades | 0 | |
| Percentage Winning Trades | 61% | |
| CAGR | 18.6% | 20.3% |
| Max Drawdown | 16.2% | 62.71% |
| MAR Ratio (CAGR/Max DD) | 1.15 | 0.32 |
Short Only – Trade Triple Witching With SQQQ
Triple witching only occurs four times a year so I wanted to test an instrument that maximized my potential returns. SQQQ is the inverse TQQQ. It is a 3x leveraged ETF that moves in the opposite direction to the TQQQ.
Rules
- Enter long at the close on Thursday before Triple Witching
- Go to cash on the next trading day after Triple Witching
Results
The results show that the strategy has been profitable 60% of the time. I like that this strategy has a high Profit Factor which tells us that winning trades tend to be larger than losing trades.
Considering the bull market throughout this period, this is a good return for a straightforward strategy that only trades four times a year.
| Metrics | Avoiding Triple Witching | Underlying Market |
|---|---|---|
| Gross Winning Trades | $86,783 | |
| Gross Losing Trades | $-46,126 | |
| Net Profit | $40,656 | $-99,984 |
| Profit Factor | 1.88 | |
| Winning Trades | 25 | |
| Losing Trades | 16 | |
| Breakeven Trades | 0 | |
| Percentage Winning Trades | 60% | |
| CAGR | 3.3% | -57.0% |
| Max Drawdown | 8.6% | 99.99% |
| MAR Ratio (CAGR/Max DD) | 0.39 | -0.57 |
The Next Step: Backtest Your Strategy
I do all my backtesting in Excel. Over many years I have developed a backtesting system that is easy for anyone familiar with Excel to use.
You can use it to test everything from simple investment ideas to complex quantitative strategies.
Tradinformed Backtest Models help you test your strategies, develop new strategies, and find the best settings.
Tradinformed Members get:
- A new backtest model, including my results and analysis every month.
- Direct access to me through the Members Webinars.
- Exclusive tutorials so that you can quickly understand and use the models.
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