Double Witching

What Is Double Witching?

The term double witching alludes to the simultaneous expiration of two unique classes of stock options or futures. Double witching happens around the same time, regularly on the third Friday of every month with the exception of March, June, September, and December.

Assets that can fall into the double witching category incorporate stock options, index options, stock index futures, or single stock futures. Double witching is like triple witching and quadruple witching, yet rather than two lapsing classes there are three or four, separately.

How Double Witching Works

Double witching happens when two distinct types of stock contracts lapse around the same time on the third Friday of each and every month aside from March, June, September, and December. As indicated over, these contracts incorporate stock options, index options, index futures, or single stock futures. Double witching days can bring about increased trading volume and volatility — especially in the last hour of trading going before the closing bell. This period of the day is known as the witching hour.

Contracts that are permitted to lapse might require the purchase or sale of the underlying security. This means traders who just need derivative exposure need to close, roll over, or offset their open positions prior to the close of trading on double witching days. Speculators, however, may add to volatility by searching for arbitrage opportunities.

Just like double witching, theorists might add to market volatility whenever they search out arbitrage opportunities.

While a large part of the trading that happens during double witching days is connected with the squaring of positions, the flood of activity can likewise drive price failures, which draws short-term arbitrageurs. These opportunities are much of the time the impetuses for heavy volume going into the close, as traders endeavor to profit on small price uneven characters.

Special Considerations

A futures contract, which is an agreement to buy or sell an underlying security at a predetermined price on a predefined day, commands the settled upon transaction to happen after the expiration of the contract. For instance, one futures contract on the Standard and Poor's 500 (S&P 500) is valued at 250 times the value of the index. On the off chance that the index is priced at $2,000 at expiration, the underlying value of the contract is $500,000, which is the amount the contract owner is committed to pay assuming the contract is permitted to lapse.

To keep away from this obligation, the contract owner closes the contract by selling it prior to expiration. Subsequent to closing the terminating contract, exposure to the S&P 500 index can be kept up with by purchasing another contract in a forward month. This is alluded to as rolling over a contract.

Options that are in the money present a comparable situation for holders of lapsing contracts. For instance, the seller of a covered call option — who produces an income stream by holding a long position in a stock while composing call options on that asset — can have the underlying shares called away on the off chance that the share price closes over the strike price of the lapsing option. In this situation, the seller has the option to close the position before the expiration date to keep holding the shares or to permit the option to terminate and have the shares called away.

Double Witching versus Triple Witching versus Quadruple Witching

Double witching is just similar to triple and quadruple witching, for certain undeniable differences. Triple witching happens when stock options, stock index futures, and stock index options contracts all lapse around the same time. Not at all like double witching, triple witching just happens four times consistently — the third Friday in March, June, September, and December. This is similar time while quadruple witching happens. This is when stock options, stock index futures, index options, and single stock futures all lapse around the same time.

Double witching is probably going to happen on the third Friday of the eight months that are not quadruple witching. On double witching days, the terminating contracts are typically options on stocks and stock indices, since futures options lapse on various days relying upon the contract.

As quadruple witching has never truly gotten on as a term, even however triple witching days have likewise incorporated the expiration of single stock futures starting around 2002, quadruple witching days are still sometimes alluded to as triple witching days.

Features

• Double witching happens when two distinct asset classes — stock options, index options, stock index futures, or single stock futures — lapse simultaneously.
• It happens each third Friday of every month aside from March, June, September, and December.
• Double witching days can bring about increased trading volume and volatility — especially in the last hour of trading before the closing bell.