After the bond market has closed, many of the bond traders move over to the exchanges and trade equities, options and futures. This last hour of trading is generally dominated by professional traders, program traders, and institutional traders and can often produce a higher than normal level of volatility. It also gets a lot of volume from day traders that want to be in cash overnight so the pressure is on these traders to complete the trades for that day. It makes for a very hectic final hour on some days.
Today is a somewhat unique trading day because during the last hour of trading stock index options, stock options and stock index futures all expire and roll over into the next series. Luckily this doesn’t happen very often. As a result of all of these expirations occurring on the same day, the market usually experiences increased volatility as positions are either closed out, rolled forward or allowed to expire. It can be really fascinating to watch this activity from the sidelines. But it’s not nearly as much fun to participate in it. I generally just step aside during these events and let the big boys play.
Luckily this occurs only four times each year on the third Friday in March, June, September and December. When it occurs it’s generally referred to as “The Triple Witching Hour” and it’s generally three times more exciting, bewildering and confusing than a normal witching hour.
Of the three items expiring on this day, I only deal in stock options. And I only do this for the sole purpose of getting into or getting out of a particular stock or simply to increase my monthly and/or weekly options income. I always have a plan in place long before this day approaches. For me this triple witching hour is simply a spectator event. I rarely if ever transact on those days. That's because before I even decide to sell puts or calls I’ve already made the decision on what to do at expiration regardless of whether the option expires worthless, I lose the stock, or I am put the stock. Therefore I just step aside during the triple witching hour and I let the crazies dance with each other.
On 8 November 2002 Single Stock Futures (SSF) were approved for trading. They too are scheduled to expire on this third friday of every third month. As a consequence of this additional fourth futures contract expiring on this same day, the triple witching hour is sometimes referred to as either the quadruple witching hour or freaky friday. However those monikers are often ignored or forgotten because of the tradition of using the term triple witching hour.
Regardless of what anyone calls this day, option and futures traders need to seriously be aware of these expiration dates because they can greatly affect your financial health when ignored. As an options trader I track these dates religiously. If you want to know when these scheduled event are expected to occur next year, please see the "2014 Options Expiration Calendar" which can be downloaded below.
Good Luck and Good Trading. And be careful during that Triple Witching Hour today!