Witching Hour

What Is the Witching Hour?

The witching hour is the last hour of trading on the third Friday of every month when options and futures on stocks and stock indexes terminate. This period is much of the time described by heavy volumes as traders close out options and futures contracts before expiry. Positions are then frequently re-opened in contracts that lapse sometime in the future.

Figuring out Witching Hours

The witching hour is the last hour of trading in a derivatives contract before it at last lapses. All the more frequently traders will utilize terms, for example, "triple witching", which alludes to the expiration of stock options, index futures options, and index futures around the same time. This event happens on the third Friday of March, June, September, and December.

Since single stock futures likewise lapse on similar triple witching schedule, the terms quadruple and triple witching are utilized conversely. The double witching hour, in the mean time, happens on the third Friday of the eight months that aren't triple witching. On double witching, the lapsing contracts are normally options on stocks and stock indexes.

The activity that happens during month to month witching hours can be broken down into two categories: rolling out or closing expiring contracts to stay away from the expiration and purchases of the underlying asset. Due to the awkward nature that can happen as these trades are being placed, arbitrageurs likewise look for opportunities coming about because of pricing shortcomings.

Motivations to Offset Positions

The primary justification behind raised activity on witching hour days is contracts that are not closed out may bring about the purchase or sale of the underlying security. For instance, futures contracts that are not closed need the seller to deliver the predefined quantity of the underlying security or commodity to the buyer of the contract.

Options that are in-the-money (ITM) may bring about the underlying asset being practiced and assigned to the contract owner. In the two cases, if the contract owner or contract [writer](/composing an-choice) isn't in that frame of mind to pay the full value of the security to be delivered, the contract must be closed out prior to expiration.

Rolling out or rolling forward, then again, is the point at which a position in the terminating contract is closed and once again opened into a contract lapsing sometime in the not too distant future. The trader closes the terminating position, settling the gain or loss, and afterward opens another position at the current market rate in an alternate contract. This cycle makes volume in the terminating contract and the contracts the traders are moving into.

Opportunities for Arbitrage

Notwithstanding the increased volume connected with the offsetting of contracts during witching hours, the last hour of trading can likewise bring about price inefficiencies and, with it, potential arbitrage opportunities. Due to heavy volume coming in throughout a short time period, crafty traders look for lopsided characteristics in supply and demand.

For instance, contracts addressing large short positions might be bid higher assuming that traders anticipate that the contracts should be purchased to close positions prior to expiration. Under these conditions, traders might sell contracts at briefly high prices and afterward close them out prior to the furthest limit of the witching hour. On the other hand, they could buy the contract to ride the up wave, then, at that point, sell once the buying free for all dials back.

Highlights

• The witching hour is the last trading hour before options or different derivatives contracts terminate.
• Double, triple, or quadruple witching allude to the simultaneous expiration of several distinct classes or series of options contracts.
• This period is many times portrayed by heavy volumes as traders race to close out or roll positions.