Witching Hour: What it Means, How it Works

For market players, being attuned to these periodic tempests and recalibrating strategies in anticipation can be instrumental in adeptly steering through the tempestuous waters of triple witching intervals. December 2008’s triple witching is etched in market memory after the Dow fell 680 points and a recession was declared. Amidst the cataclysmic financial meltdown, an already turbulent market landscape was further shaken by the understanding buy and hold investment strategy expiring contracts. Specifically, on December 19, 2008, the Dow Jones Industrial Average rode a rollercoaster, gyrating over 200 points throughout the day, only to culminate 65 points above its opening position. This fervent activity underpinned the compounded volatility injected by triple witching into an already fragile market milieu.

What a Triple Witching Day Means for the Stock Market

Triple witching, encompassing the convergence of stock index futures, stock index options, and stock options, emerges as a standout event in the financial markets. With its arrival on the third Friday of certain months, it introduces both windows of opportunity and areas of potential concern for those immersed in the financial world. As the hour of triple witching draws near, key players like institutional investors and hedge funds recalibrate their hedging blueprints, seeking to shield their assets from potential market turbulence.

Trading on margin is only for experienced investors with high risk tolerance. For additional information about rates on margin loans, please see Margin Loan Rates. In this way you can see at a glance what the typical course of Apple share prices look like around the Witching Days. My primary focus was on understanding the impact on individual stock investments. Triple witching may manias, panics, and crashes be a good trading opportunity or largely a non-event, depending on how you approach the market.

1. This happens four times a year and can lead to increased volume, as money is moved around resulting in sometimes unusual (or spooky) price action.
2. Rolling out or rolling forward, meanwhile, is when a position in the expiring contract is closed and replaced with a contract expiring at a later date.
3. Triple witching is often said to cause volatility in the underlying markets, and in the expiring contracts themselves, both during the prior week, and on the expiration day.
4. Despite the overall increase in trading volume, triple-witching days do not necessarily lead to high volatility.

What is Triple Witching Day – and Should You Worry About It?

Triple witching underscores the intricate dance of key financial instruments, spotlighting both its benefits and challenges. As traders navigate this event, understanding its potential for increased liquidity and market efficiency, as well as its inherent volatility and complexity, becomes crucial. A frequent arbitrage avenue during triple witching emerges from the price rifts between stock index futures and their inherent indexes. When misalignments surface, traders can engage with the devalued entity and concurrently offload the inflated one, ensuring a profit as price paths intertwine.

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Alternatively, they might buy the contract to ride the wave up, then sell once the buying frenzy slows down. On the expiration date, futures and options (if exercised), must be settled which means either the underlying asset needs to be delivered or the settlement is made using cash. Stock index futures and options are typically cash-settled, whereas you need to deliver the stock in case of single stock options. Securities or other financial instruments mentioned in the material posted are not suitable for all investors.

The Witching Hour and Triple/Quadruple Witching

Triple witching is simply the term given to four unique trading days each year. How an individual day trader chooses to handle triple witching will depend on their trading style, trading strategies, and level of trading experience. New traders will want to be more cautious in the days leading up to and on Triple Witching Friday.

At its core, Triple Witching is the quarterly event when three different types of financial derivatives contracts—stock options, stock index futures, and stock index options—all expire on the same day. Because multiple derivatives (futures and options) are connected to a similar underlying asset class, volume spikes and the above-average trading volume can create unpredictable price action. One strategy is to look for arbitrage opportunities from price discrepancies between the stock market and derivative markets. Also, some traders might take up a straddle strategy, holding both a put and a call option with Supernational bond the same strike price and expiration date, to try to profit from large price swings in either direction. However, these strategies have risks and are not recommended for less experienced traders.