Witching Hour: CNBC Explains

Witching hour may sound like a local bar promotion on a Halloween night, but it's really three important time periods for investors and the markets.

So what are they and how do they impact investments? CNBC explains.

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What are witching hours?

Witching hours occur when financial contracts—specifically options and futures—end on the third Friday of a month.

The time periods—double, triple, quadruple—reflect the number of contracts that expire.

Traditionally, all contracts expire in the same hour—thus the name witching hour—usually the last hour of trading.

However, some contracts for all three time periods can expire at the beginning of a trading day as well.

What are options and futures?

Options and futures are the contracts that expire on witching hours. Options give investors the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Options contracts are available on most of stocks, commodities, currencies, and other assets. You can even trade options on futures contracts.

Futures are contracts obligating the buyer to purchase an asset (or the seller to sell an asset), such as a commodity like corn, or a financial instrument like a stock, at a predetermined future date and price.

What is double witching?

Double witching is the expiration of two related types of options and futures mentioned above. For example, it can be a stock option contract and stock future contract that both expire at the same time, or it can be a market index option and market index future that do the same.

Double witching happens eight times a year and occurs on the third Friday of the month—except in March, June, September, and December.

What is triple witching?

Triple witching is the expiration of stock options, stock futures, and an index option or index futures contract at the same time. The triple expiration happens four times a year on the third Friday of the month in March, June, September, and December—the months when double witching does not occur.

What is quadruple witching?

Quadruple witching happens when three related classes of options and futures contracts expire, along with the individual stock futures options.

Like triple witching, quadruple witching is the ending of contracts on the third Friday of every March, June, September, and December.

Quadruple witching is a relative newcomer, as it started after 2001. That's when single stock futures were introduced to traders.

What happens on a witching hour day?

On the day of a quadruple witching, many investors attempt to end their futures and options positions before the contracts expire. This activity often includes repurchasing contracts and/or closing out market positions.

Quadruple witching days are usually accompanied by considerable volatility in stock and derivative prices, as well as increased trading volume. Knowing that this is a volatile time, investors can anticipate and plan for the potential effects.

What is the effect of witching hours on the markets?

Witching hours are used by traders to try to profit from the volatility in the underlying stocks or commodities.

With all the activity of the contracts ending—most especially with triple and quadruple witching—and the reshuffling of market holding, the effect is usually a dramatic increase in trading volume, or the number of shares bought and sold.

Since 2007, both stock and options trading volume during quadruple witching days rose by about 55 percent to 60 percent, more than the daily average for the year.

Also of note: the value of future options—ones that have yet to expire—may be slightly higher than usual on the Thursday prior to quadruple witching and on quadruple witching Friday itself, due to the increased amount of trading.

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