What is Witching Hour?

278 reads · Last updated: December 5, 2024

The witching hour is the last hour of trading on the third Friday of each month when options and futures on stocks and stock indexes expire. This period is often characterized by heavy volumes as traders close out options and futures contracts before expiry. Positions are then often re-opened in contracts that expire at a later date.

Definition

The Quadruple Witching Hour refers to the last hour of trading on the third Friday of each month when stock and stock index options and futures expire. This period is typically characterized by high trading volumes as traders close out options and futures contracts before expiration and often open new positions with later expiration dates.

Origin

The concept of the Quadruple Witching Hour originated in the financial markets with the trading of options and futures. As these derivative markets developed, traders identified the third Friday of each month as a critical expiration date, leading to increased market volatility and trading volume.

Categories and Features

The Quadruple Witching Hour primarily involves stock options, stock index options, and futures contracts. Its features include high trading volumes and increased market volatility. During this period, traders typically adjust their portfolios to manage the expiring contracts.

Case Studies

A typical case is the Quadruple Witching Hour in March 2020, when trading volumes and volatility reached unusually high levels due to market concerns over the COVID-19 pandemic. Another example is the December 2018 Quadruple Witching Hour, where the market experienced significant volatility amid Federal Reserve interest rate hikes.

Common Issues

Common issues investors might face during the Quadruple Witching Hour include increased market volatility leading to risk, and potential liquidity issues due to high trading volumes. Investors should carefully manage risk and adjust their investment strategies as necessary.

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