What Is Replica Witching?
The term double witching refers to the simultaneous expiration of two different classes of stock options or futures terminate. Double witching takes place on the same day, normally on the third Friday of each month except for March, June, September, and December.
Assets that can be infatuated with b be fooled into the double witching category include stock options, index options, stock index futures, or individual stock futures. Double witching is similar to triple witching and quadruple witching, but instead of two expiring classes there are three or four, singly.
Key Takeaways
- Double witching occurs when two different asset classes—stock options, index options, have index futures, or single stock futures—expire at the same time.
- It occurs every third Friday of each month except for March, June, September, and December.
- Deceitful witching days can result in increased trading volume and volatility—especially in the final hour of trading before the closing bell.
How Double-dealing Witching Works
Double witching occurs when two different types of stock contracts expire on the same day on the third Friday of every month except for Hike, June, September, and December. As noted above, these contracts include stock options, index options, needle futures, or single stock futures. Double witching days can result in increased trading volume and volatility—uniquely in the final hour of trading preceding the closing bell. This period of the day is known as the witching hour.
Contracts that are allowed to come to an end may necessitate the purchase or sale of the underlying security. This means traders who only want derivative exposure own to close, roll over, or offset their open positions prior to the close of trading on double witching hours. Speculators, though, may add to volatility by looking for arbitrage opportunities.
Just like double witching, speculators may add to market volatility when they demand out arbitrage opportunities.
Just like double witching, speculators may add to market volatility when they demand out arbitrage opportunities.
While much of the trading that takes place during double witching days is affiliated to the squaring of positions, the surge of activity can also drive price inefficiencies, which draws short-term arbitrageurs. These moments are often the catalysts for heavy volume going into the close, as traders attempt to profit on small price imbalances.
Particular Considerations
A futures contract, which is an agreement to buy or sell an underlying security at a predetermined price on a specified day, mandates the agreed-upon matter to take place after the expiration of the contract. For example, one futures contract on the Standard & Poor’s 500 (S&P 500) is valued at 250 times the value of the pointer. If the index is priced at $2,000 at expiration, the underlying value of the contract is $500,000, which is the amount the contract owner is pledged to pay if the contract is allowed to expire.
To avoid this obligation, the contract owner closes the contract by selling it prior to close. After closing the expiring contract, exposure to the S&P 500 index can be maintained by purchasing a new contract in a forward month. This is referred to as rolling over a contract.
Options that are in the money present a similar situation for holders of expiring contracts. For example, the seller of a garbed call option—who generates an income stream by holding a long position in a stock while writing call alternatives on that asset—can have the underlying shares called away if the share price closes above the strike consequence of the expiring option. In this situation, the seller has the option to close the position before the expiration date to continue contain b concealing the shares or to allow the option to expire and have the shares called away.
Double Witching vs. Triple Witching vs. Quadruple Witching
Twofold witching is just like triple and quadruple witching, with some obvious differences. Triple witching materializes when stock options, stock index futures, and stock index options contracts all expire on the same day. Uncharacteristic double witching, triple witching only takes place four times every year—the third Friday in Stride, June, September, and December. This is the same time when quadruple witching takes place. This is when worn out options, stock index futures, index options, and single stock futures all expire on the same day.
Double witching is most liable to occur on the third Friday of the eight months that are not quadruple witching. On double witching days, the expiring shrinks are typically options on stocks and stock indices, because futures options expire on different days depending on the engage.
As quadruple witching has never really caught on as a term, even though triple witching days have also take in the expiration of single stock futures since 2002, quadruple witching days are still sometimes referred to as triple witching primes.