Double Witching Definition

What Is Double Witching?

Double witching refers back to the expiration on the identical day of choices contracts for single shares and for fairness indexes.

Double witching takes place on the third Friday of every month apart from March, June, September, and December. Throughout these months, index futures additionally expire on the third Friday, turning the event right into a triple witching.

Key Takeaways

  • Double witching happens when two completely different classes of choices contracts—for shares and inventory indexes—expire on the identical day.
  • It happens each third Friday of every month apart from March, June, September, and December, which see triple witching as a result of futures contracts additionally expire on these days.
  • Double witching days may end up in elevated buying and selling quantity—on the market open on account of index choices expirations and within the ultimate hour of buying and selling forward of the expiration of inventory choices.

How Double Witching Works

Double witching is notable as a result of the month-to-month choices expirations enhance inventory market buying and selling quantity as market makers and different choices sellers liquidate inventory positions hedging the expiring contracts.

Like triple-witching Fridays, double-witching ones enhance buying and selling quantity on the market open, although the bump isn’t almost as giant.

Inventory market buying and selling quantity will increase within the morning on third Fridays as a result of many month-to-month index possibility derivatives settle that morning (together with index futures on triple-witching Fridays), prompting the promoting of hedges within the underlying shares.

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The buying and selling quantity surge linked to derivatives settled that morning is adopted by one other within the ultimate hour of market buying and selling on third Fridays attributable to the expiration on the finish of the day of month-to-month inventory choices (together with weekly ones). The inventory possibility expirations additionally immediate the liquidation of hedges within the underlying shares in addition to transactions tied to the train of in-the-money choices.

Most index choices and futures are cash-settled within the morning, spurring inventory market buying and selling volumes on the open, whereas inventory possibility expirations at day’s finish enhance buying and selling within the ultimate hour and on the market shut.

Whereas a lot of the buying and selling that takes place throughout double witching days is said to the squaring of positions, the surge of exercise may also drive worth inefficiencies, which attracts short-term arbitrageurs.

Double Witching vs. Triple Witching

Double witching is rather like triple witching, with one notable distinction. Triple witching happens when inventory choices, inventory index choices contracts and inventory index futures all expire on the identical day. Triple witching solely takes place 4 occasions yearly—on the third Friday in March, June, September, and December. Rebalancing by some indexes on triple witching days supplies one other spur to buying and selling.

Double witching happens on the third Friday of the eight months with out index futures expirations. On double witching days, the expiring contracts are choices on shares and inventory indices.