Witching Hour

Witching Hour: What it Means and How It Works

The “witching hour” in financial markets refers to the final hour of trading on the day when derivatives expire—most commonly the last hour before options or futures contracts expire. This period often sees heavier trading volumes and heightened volatility as market participants close, roll, or adjust positions to avoid unwanted exercise, delivery, or settlement.

What expires and when

• Monthly witching: Many options and futures expire on the third Friday of each month. The last trading hour of that day is often called the witching hour.
• Triple witching: Occurs quarterly (third Friday of March, June, September, December) when three types of contracts expire on the same day—single-stock options, stock index options, and stock index futures. This is a common source of elevated activity.
• Quadruple witching: When four contract types expire simultaneously (historically possible when single-stock futures traded in the U.S.); today it is rare.

Why trading spikes during the witching hour

• Closing or exercising positions: Options that finish in-the-money may be exercised; futures left open can require physical delivery or cash settlement. To avoid these outcomes, traders often close or roll positions before expiration.
• Rolling forward: Traders frequently “roll” positions—close the expiring contract and open a later-dated contract—to maintain exposure without triggering exercise or delivery.
• Speculation and hedging: Short-term traders and hedgers adjust positions based on last-minute price moves, increasing activity.
• Price inefficiencies: Large, rapid flows can create temporary mispricings that arbitrageurs and traders try to exploit, which amplifies volume and volatility.

Arbitrage and market dynamics

Heavy, concentrated order flow can briefly distort prices. Examples:
– Short-covering bids: Large short positions may be bought back ahead of expiration, pushing prices up. Traders can sell into that temporary demand.
– Momentum plays: Traders may buy contracts expecting the buying pressure to raise prices over the last hour, then exit once demand eases.
– Cross-market effects: Expiration of index derivatives can force rebalancing in underlying stocks, producing spillovers between derivatives and cash markets.

These effects make the witching hour a period of pronounced, but often short-lived, price moves and widened bid-ask spreads.

Other times of heightened activity

• Market open (first hour): Reaction to overnight news and order accumulation often produces high volume and volatility.
• Market close (last hour): End-of-day adjustments and fund rebalancing can increase activity even on non-expiration days.
• Overlapping trading hours across exchanges (e.g., London/New York): More participants lead to livelier markets.
• Economic data releases and central bank decisions: Sudden information can trigger rapid, concentrated trading.

Practical tips for traders

• Expect wider spreads and lower depth: Use limit orders rather than market orders to control execution price.
• Manage assignment risk: Close short-option positions that might be assigned if you cannot or do not want to accept delivery/exercise.
• Reduce leverage or size near expirations: Volatility spikes can magnify losses.
• Consider liquidity: Avoid initiating large positions in illiquid contracts on expiration days.
• Plan roll strategies in advance: If you intend to maintain exposure, predefine when and how you will roll to later expirations.
• Monitor correlated markets: Index expirations can move many underlying stocks; be aware of cross-market effects.

Summary

The witching hour is the final hour of trading on expiration days, when the concentration of expiring derivatives produces surges in volume, temporary price dislocations, and greater volatility. Double, triple, and—rarely—quadruple witching refer to multiple contract types expiring simultaneously, with triple witching (quarterly) often producing the most pronounced effects. Traders should prepare for wider spreads, rapid moves, and increased risk, and adjust execution and risk-management plans accordingly.

Further reading
– Feinstein, S. P., & Goetzmann, W. N., “The Effect of the ‘Triple Witching Hour’ on Stock Market Volatility.”
– U.S. Securities and Exchange Commission, “Investor Bulletin: An Introduction to Options.”
– Caporale, G. M., & Plastun, A., “Witching Days and Abnormal Profits in the US Stock Market.”