Double Witching

What Is Double Witching?

The term double witching refers to the simultaneous expiration of two different classes of stock options or futures. 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 fall into the double witching category include stock options, index options, stock index futures, or single stock futures. Double witching is similar to triple witching and quadruple witching, but instead of two expiring classes there are three or four, respectively.

How Double 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 March, June, September, and December. As noted above, these contracts include stock options, index options, index futures, or single stock futures. Double witching days can result in increased trading volume and volatility — especially 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 expire may necessitate the purchase or sale of the underlying security. This means traders who only want derivative exposure have to close, roll over, or offset their open positions prior to the close of trading on double witching days. Speculators, though, may add to volatility by looking for arbitrage opportunities.

Just like double witching, speculators may add to market volatility when they seek out arbitrage opportunities.

While much of the trading that takes place during double witching days is related to the squaring of positions, the surge of activity can also drive price inefficiencies, which draws short-term arbitrageurs. These opportunities are often the catalysts for heavy volume going into the close, as traders attempt to profit on small price imbalances.

Special 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 transaction 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 index. 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 obligated to pay if the contract is allowed to expire.

To avoid this obligation, the contract owner closes the contract by selling it prior to expiration. 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 covered call option — who generates an income stream by holding a long position in a stock while writing call options on that asset — can have the underlying shares called away if the share price closes above the strike price of the expiring option. In this situation, the seller has the option to close the position before the expiration date to continue holding the shares or to allow the option to expire and have the shares called away.

Double Witching vs. Triple Witching vs. Quadruple Witching

Double witching is just like triple and quadruple witching, with some obvious differences. Triple witching occurs when stock options, stock index futures, and stock index options contracts all expire on the same day. Unlike double witching, triple witching only takes place four times every year — the third Friday in March, June, September, and December. This is the same time when quadruple witching takes place. This is when stock options, stock index futures, index options, and single stock futures all expire on the same day.

Double witching is most likely to occur on the third Friday of the eight months that are not quadruple witching. On double witching days, the expiring contracts are typically options on stocks and stock indices, because futures options expire on different days depending on the contract.

As quadruple witching has never really caught on as a term, even though triple witching days have also included the expiration of single stock futures since 2002, quadruple witching days are still sometimes referred to as triple witching days.