Triple Witching Hours
Triple witching hour occurs four times a year, and is a time when traders should watch out. It’s actually when single stock options, stock index options, and stock index futures contracts all expire at once. In the United States it’s from 3 PM to 4 PM New York time on the third Friday of March, June, September, and December. In the United Kingdom the triple witching hour occurs between 10:15 AM and 10:30. At this time trading volume increases, and volatility is often up too, which means you can expect a lot of activity to be reflected in the prices.
 |
|
 |
|
Single stock options give the option buyer the right to buy or sell one hundred shares of a particular stock at a certain price. The call option is the right to buy, and the put option means the option buyer can sell the stock at a set price. As these are options, the buyer has the choice, and the option is only taken up if it would be profitable.
The same principle applies to stock index options. These are based on stock indices, such as the S&P 500, and their value on the expiration date. As it is an index, the option buyer does not actually buy or sell any shares, but these options are cash settled for any gains that the buyer has made.
The third type of contract is the stock index future. A futures contract must always be satisfied, whether it is winning or losing for the trader. With commodity futures, there is a choice of whether the commodity will be provided, but again as with the option case, as the stock index future is based on stock indices it must be settled in cash for the difference between the contract value and the index value at expiration.
The triple witching hour is an especially exciting time to be in the market, as the stock prices can vary in response to this variety of pressures. Many large institutional investors are seeking to offset their futures and options positions before the closing bell, and they also use these to hedge their positions. As they unwind the trades that they are in, the prices can vary wildly, leading to the other name for this day which is ‘freaky Friday’. Add to this the fact that computerized trading will kick in to protect the portfolios of derivative traders and ensure that they are not exposed to crippling losses if the markets move against them, and you can see that trading in this time is not for the faint of heart.
This doesn’t mean that you can’t take advantage of all this activity, particularly if you are spread betting and thus leveraging your funds to control a greater amount of financial instruments. If you see that stock prices are moving in response to the activity of the positions being closed or offset, then you can set up an opposite trade. For instance if the stock price has risen by 5%, you can take out a short position; if the price has fallen, then go long with your spread bet.
The reason for this trade is that the stock prices tend to go back to their natural level on the following Monday, allowing you to make a quick profit from holding the position over the weekend. Incidentally, this means that the triple witching hour is not a significant event for a long-term investor. While it produces temporary glitches in the price, it usually has no lasting effects, and the long-term investor is best advised to look away while it is happening.
Join the discussion