Double Witching: Definition, Impact, and Strategies
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Summary:
Double witching, a term derived from “triple witching,” refers to the simultaneous expiration of options contracts for individual stocks and equity indexes. It typically occurs on the third Friday of each month, except for months when index futures contracts also expire, making it a triple witching event. This phenomenon leads to increased trading volume, particularly at the market open and close, as market participants adjust their positions in response to expiring contracts.
What is double witching?
Double witching, a concept prevalent in the finance industry, denotes the concurrent expiration of options contracts for individual stocks and equity indexes on the same day. It primarily unfolds on the third Friday of each month, with exceptions in months featuring the expiration of index futures contracts, which escalates the event to a triple witching occurrence.
How double witching works
The mechanics of double witching revolve around the dynamics of options contracts and their expiration impact on market activity. Market participants, particularly market makers and options sellers, are prompted to adjust their positions as contracts near expiration.
On double witching days, trading volume surges, particularly during the market open and close, driven by the settlement of monthly index option derivatives. This settlement, coupled with the expiration of stock options contracts, triggers significant activity as traders hedge their positions and engage in transactions tied to expiring contracts.
Notably, most index options and futures contracts are cash-settled, intensifying trading volumes at the market open, while stock option expirations at the end of the day stimulate trading activity in the final hour and at the market close.
Double witching vs. triple witching
Double witching and triple witching are closely related phenomena within the finance industry. The key distinction lies in the inclusion of index futures contracts in triple witching, which amplifies the impact on market activity.
While double witching involves the expiration of options contracts for individual stocks and equity indexes, triple witching encompasses the additional expiration of stock index futures contracts. Triple witching occurs four times annually, aligning with the third Friday of March, June, September, and December.
Frequently asked questions
How does double witching affect market volatility?
Double witching can contribute to heightened market volatility due to increased trading activity and the expiration of options contracts, leading to fluctuations in prices.
Are there specific strategies traders employ during double witching?
Traders may employ various strategies during double witching, including option hedging, arbitrage, and volatility trading, to capitalize on price movements and market inefficiencies.
Does double witching impact all sectors equally?
While double witching can impact overall market activity, its effects may vary across different sectors and industries based on factors such as liquidity, market sentiment, and the composition of expiring contracts.
Key takeaways
- Double witching involves the simultaneous expiration of options contracts for individual stocks and equity indexes.
- It occurs on the third Friday of each month, except for months featuring the expiration of index futures contracts.
- Increased trading volume and market volatility are notable characteristics of double witching days.
- Traders may employ various strategies to navigate and capitalize on the opportunities presented by double witching.
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