Witching Hour: CNBC Explains
Fri, 20 Mar '15 | 12:27 PM ET CNBC.com
Witching hour—though it may sound like a Halloween promotion at a local bar— describes three important time periods for investors and the markets.
What are witching hours?
Witching hours occur when financial contracts—specifically options and futures—end on the third Friday of a month.
The time periods—double, triple, quadruple—reflect the number of contracts that expire.
Traditionally, all contracts expire in the same hour—thus the name witching hour—usually the last hour of trading.
However, some contracts for all three time periods can expire at the beginning of a trading day as well.
What are options and futures?
Futures and options are the contracts that expire on witching hours. Futures are contracts obligating the buyer to purchase an underlying asset (or the seller to sell
an asset), such as a commodity like corn, or a financial instrument like a stock, at a predetermined future date and price.
Options give investors the right, but not the obligation, to buy or sell an underlying asset at a set price on or before a given date. Options contracts are available on most of stocks, commodities, currencies, and other assets. You can even trade options on futures contracts.
These futures and options contracts fall into four broad categories: market index options, market index futures, stock options and stock futures.
What is the effect of witching hours on the markets?
Witching hours are used by traders to try to profit from the volatility in the underlying stocks or commodities.
Average S&P Volatility Index (VIX) for March '10 -'15: Measures expected stock market volatility for the next 30 daysSource: www.cnbc.com