What it means
On triple witching days, three types of contract expire together: stock options, stock index options and stock index futures. Many investors and institutions hold these contracts to hedge or speculate, and they must decide before expiry whether to close, exercise or roll them into a later date.
Because many decisions land in the same hour, trading volume can rise sharply. The extra activity comes from several sources.
Funds that track an index may need to trade shares to match changes in the contracts they hold, and arbitrage traders who profit from small price gaps between futures and the underlying shares unwind their positions. The result can be quick price moves that have little to do with company news.
The name reflects the idea that prices can behave oddly, as if under a spell. It is a piece of market slang, not a technical definition, and the effect varies from one expiry to the next.
Some quarters pass quietly, while others show large swings close to the closing bell, particularly when markets are already nervous. For long-term investors and business managers, the practical point is to avoid reading too much into the price action.
A sudden move in a share price during this hour may be caused by contract expiry, not by new information about the company. Anyone who must trade, such as a company running a share buyback or an executive selling shares under a pre-set plan, may prefer to avoid the busiest hour to reduce the risk of an unfavourable price.
Exchanges and index providers publish expiry calendars, and the exact timings and contract types can change over time. Because of this, readers should check current exchange schedules rather than rely on any single description.
Similar expiry effects exist in other markets around the world. It also helps to know the vocabulary around the event.
A monthly expiry on the third Friday is smaller than the quarterly triple witching, and some markets add a fourth element when single stock futures are listed. Traders use the broad term expiration day for all of these, and the witching hour label is simply the dramatic name for the last hour.
In practice
Real-world examples.
Example
A pension fund manager needs to sell $5,000,000 of shares to pay benefits. She avoids the final hour of a triple witching day, because heavy volume and quick price moves could make the sale more expensive than usual.
Example
An index fund must adjust its holdings after changes to an index take effect at the close on an expiry day. The fund's traders submit orders for the closing auction, knowing that volumes will be high and spreads can be unusual.
Example
A financial journalist notes that a technology stock fell 3% in the last hour of Friday trading. A trader explains that it was expiry day, and the move was driven by option and futures positions rather than a change in the company's prospects.
Case study
Seen in the real world.
Marlow Industries is a fictional listed company, and this story is illustrative only. Its treasury team planned to buy back $2,000,000 of its own shares during the last week of the quarter. The first plan placed a large order in the final hour of the third Friday, which turned out to be a triple witching day.
The head of treasury noticed the calendar and moved the purchase to earlier days, spreading it as four orders of $500,000 over four sessions. The average price paid was close to the volume-weighted market price, and the company avoided the swings of the expiry hour. The illustrative lesson is that checking the market calendar costs nothing and can protect execution quality.
Watch out
Common mistakes.
- Treating a big price move in the last hour of an expiry day as news about the company, when it may be caused by contract expiry.
- Assuming that the witching hour always produces wild swings, when some expiry days are quiet.
- Thinking that it affects only professional traders, when index funds and retirement savers' funds can also be touched indirectly.
Questions
People also ask.
What is triple witching?
It is the day on which stock options, stock index options and stock index futures all expire, normally on the third Friday of March, June, September and December.
Why is volume higher?
Many contracts must be closed, exercised or rolled forward at the same time, and index funds and arbitrage traders adjust their holdings.
Should long-term investors worry about it?
Usually not, because the price moves tend to be short-lived, but it is wise to avoid placing large orders at that time without a reason.
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