Triple witching hour is when stock options, stock index options and stock index futures contracts all expire simultaneously. There is one type of deal for options and two for futures, hence the name triple witching. It is the expiration of individual stock options that can result in increased volatility in shares and provide the opportunity to make some gains.
Triple witching hour is the final hour of the stock market trading session on the third Friday of every March, June, September, and December. In the UK a triple witching hour occurs between 10.15 am and 10.30 am while in the US it happens over the course of an hour, hence the name, during which trading is temporarily stopped.
Options involve trading, or agreeing to trade, stock at a future date at a certain price. When all three contracts expire at once traders rush to balance portfolios which can lead to significant volatility in the underlying indices. During such times computerised trading programmes go into overdrive to balance the portfolios of derivative traders and make sure they are not exposed to crippling losses should the markets move against them.
Sometimes this simultaneous trading can trigger huge movements in the underlying stocks. The most famous recent instance of triple-witching occurred just after 11 September 2001, when jittery markets coincided with triple witching in both the US and the UK. The FTSE 100 fell by 337 at one stage and over 4.1bn shares changed hands.
This volatility will depend on the number of put options versus call options on each individual stock. If there are more puts, then sales will outnumber purchases and the share price may fall. The reverse is true when there are more calls.
You cannot aggregate the number of puts versus calls ahead of the event – but after the 15 minutes are up there is sometimes a chance to make a quick turn. If a stock comes out of the period up 5% you can short it and, if it comes out down 5%, buy it on the assumption that the share price will settle back to where it was before the triple witching hour.