What Is the Witching Hour?

What Is the Witching Hour?

Let me explain what the witching hour means in trading. It's that last hour of trading on the third Friday of every month when options and futures on stocks and stock indexes come to their expiration. You'll see heavier trading volumes during this time because traders are closing out their options and futures contracts before they expire. After that, they usually reopen positions in contracts that expire later on.

Key Takeaways

Here's what you need to know directly: The witching hour is the final trading hour before options or other derivatives contracts expire. You can expect higher trading volume as investors hurry to close or roll their positions. Terms like double and triple witching describe when two or three types of derivative contracts expire on the same day.

Understanding Witching Hours

The witching hour is simply the last hour of trading before derivatives contracts expire. Traders often talk about 'triple witching,' which is when stock options, index options, and index futures all expire on the same day. This happens on the third Friday of March, June, September, and December.

Back when single-stock futures were allowed in the U.S. from 2002 to 2020, they expired on the same schedule, creating 'quadruple witching.' Double witching, on the other hand, occurs on the third Friday of the other eight months, involving options on stocks and stock indexes.

All this activity during monthly witching hours comes from rolling out or closing expiring contracts to avoid having to buy the underlying asset at expiration. Imbalances from these trades can create price inefficiencies, and that's where arbitrageurs step in to profit.

Reasons to Offset Positions

The main reason for the spike in action on witching-hour days is to avoid the consequences of not closing contracts before expiration, which could force you to buy or sell the underlying security. For instance, if futures contracts aren't closed, the seller has to deliver the specified quantity of the security or commodity to the buyer. Options that are in the money—meaning they're profitable—might get exercised, assigning the underlying asset to the contract owner. In either case, if the contract holder or writer isn't prepared to handle the delivery, they must close out the contract before it expires.

Rolling out or rolling forward means closing the position in the expiring contract and opening a new one that expires later. You settle any gain or loss from the expiring position and then start fresh in a different contract at the current market rate.

Opportunities for Arbitrage

Beyond the increased trading, the witching hour can lead to price inefficiencies, opening up arbitrage opportunities. With so many trades happening quickly, traders look to profit from even small imbalances.

For example, contracts with large short positions—those betting on a price drop—might get bid higher if traders expect them to be bought back before expiration. When that occurs, you could sell contracts at these temporarily inflated prices and close them out before the witching hour ends. Or, you might buy the contract to ride the upward wave and sell once the buying slows.

The Witching Hour and Triple/Quadruple Witching

Triple- and quadruple-witching days are when three or four types of contracts expire: stock index futures, stock index options, single-stock options, and options on stock index futures. Triple witching occurs four times a year, while quadruple witching is less common. The bunching of these expirations can drive higher market volatility and trading volumes.

Triple-Witching Dates

Triple witching takes place on the last Friday of each trading quarter—March, June, September, and December. The last one for 2023 was on Dec. 15, and in 2024, they are March 15, June 21, Sept. 20, and Dec. 20.

As the witching hour nears with these expiration deadlines, trading activity surges because market participants are closing or rolling over positions in time. This often causes volatility to spike in the final hour across derivatives markets and their underlying assets, with speculative plays and hedging affecting equities too.

While witching days see active trading overall, the last witching hour is where the frenzy peaks right before expiration and settlement at the market close.

Why Does Trading Volume Tend to Spike During the Witching Hour?

The spike comes from the concentration of expiring contracts across asset classes, prompting activity from those closing or rolling positions, speculators betting on last-minute volatility, dynamic hedgers, and those exploiting brief mispricings. This mix drives the surge in the witching hour.

Why Is it Called the “Witching Hour”?

In folklore, the 'witching hour' is a time at night, often midnight, linked to supernatural events when witches, demons, and ghosts are most active.

In finance, the name fits because of the heightened volatility and trading volume right before the end of the trading day, like a financial midnight. As derivatives expire, traders scramble to close, roll out, or fulfill contracts, creating a flurry of activity and sometimes unpredictable moves, echoing the chaos of folklore's witching hour.

What Other Trading Hours Feature a Flurry of Trading Activity?

Market openings see a lot of action; the opening bell brings reactions to overnight news, spiking volumes. In the U.S., the first hour on the NYSE from 9:30 a.m. to 10:30 a.m. Eastern is especially busy.

Market closes also ramp up; the last hour from 3 p.m. to 4 p.m. Eastern sees investors adjusting positions before the day ends, often with higher volumes and volatility.

Overlaps in major market hours, like between New York and London, increase activity due to more traders participating at once. Similar to the witching hour, this can create arbitrage chances between local and U.S.-traded shares of foreign companies.

Releases of economic data, such as employment figures, GDP, or central bank decisions, trigger immediate reactions and intense trading.

The Bottom Line

In the end, the witching hour in financial markets is the last trading hour on the third Friday of each month when options and futures on stocks and indexes expire. It's known for heavy volumes and volatility as investors close or roll positions before the close. Double, triple, and quadruple witching happen when multiple contract types expire at once, with triple witching being especially volatile due to the concentration.