Investors who are new to the stock option investing markets may hear frightening tales of the dreaded Triple Witching Hour or worse, The Quadruple Witching Hour. Boo! Spooky language! However, there is nothing to be afraid of. These terms simply describe a quarterly event wherein several types of derivative contracts expire on the same day. This typically happens on the third Friday in March, June, September, and December.
The original term Triple Witching Hour began in the 1980’s. At the time, stock options, index options, and index futures would expire at the same time in the morning of the third Friday of the months mentioned above. With market conditions at the time, these Triple Witching Hour dates were marked by high volume, changes in volatility and large swings in the stock market. When stock option expiration was changed to the afternoon hours, investors started referring to these witching Friday’s as Triple Witching Expiration, or Triple Witching Date. With the introduction of single stock futures, there now exists the Quadruple Witching Date when all four derivatives expire on the same day.
With so many different types of contracts expiring, it is natural to expect an increase in trading volume. Investors move to manage their positions either by closing their obligations, rolling to new expiration months, exercising their contracts, or let themselves be assigned. In fact, 3 of the top 5 daily volumes at the NYSE were on Triple Witching Dates:
Date – Volume (in thousands)
Sep 16th, 2005 – 3,092,763
Mar 18th, 2005 – 2,783,787
Dec 17th, 2004 – 2,690,208
Although the volumes were extremely high on these days, the volatility of the general market did not seem too affected. For example, on December 17th, 2004 the VIX (CBOE Volatility Index) did move up slightly during the day, but it closed 0.32 lower than the close on December 16th, 2004. The VIX levels did not really change at all on March 18th, 2005 from the previous close. However, there was a noticeable decline in the VIX on September 16th, 2005.
Historically there were large shifts in volatility during the Triple Witching Hours of the 1980’s. Nowadays, most market experts feel that the changes in expiration times, timeliness of order executions, and changes to the overall market structure have reduced the volatility swings on these days.
Options investors should be aware of the potential for increased activity in the markets on these dates, but it is nothing to fear or panic over. You can take down the string of garlic over your trading monitor and tuck the silver bullets back into your desk. The Triple and Quadruple Witching Hours are merely a quarterly date where several different derivatives will expire on the same day.
[tags]Witching Hour, Triple Witching, Quadruple Witching, stock options, index options, index futures, single stock futures[/tags]