The Triple Witching Hour
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Three bewitching witches convene around their Bloomberg terminals. “Let’s have some fun and give the markets a little spook” they say.
It is Friday September 17th, 2021 . The time is 3:00 pm EST.
Witch Number One says: “I’ll trade stock index* futures”
Which Number Two says: “I’ll trade stock index options”
Witch Number Three says: “I’ll trade stock options”
*The S & P 500 index is an example of a stock index.
Welcome to the Bewitching Witches of Wall Street.
Witches are said to have supernatural skills and abilities.
One of those skills is conjuring up money. Lots and lots of money. Money they can use during the triple witching hour to wreak havoc on Wall Street.
Is it witchcraft ?
The Triple Witching Hour in the investment world is a real thing.
The phrase is used to describe the day that three types of equity backed contracts expire .
The day is always the same,
It is the third Friday in March, June, September, and December also known as “option expiration” days. [1].
The time, 3:00 pm EST is one hour before the close of stock market trading.
Witches become hyper-active during the final hour of trading, or so the legend goes.
I think there is more significance to the time of day .
Witches become most “active” around midnight.
I’m not speaking from experience, I just read a lot, and all of this is in Wikipedia so it must be true.
It is thought that witches first appeared in ancient Egypt or Babylonia.
If we use Cairo as a proxy, when it is 3 pm on the east coast, it is midnight in Cairo.
Hmmm…coincidence? I think not.
The mischief they create is known as volatility. The markets “get spooked” as the triple witching hour approaches.
Now for the real story.
The real story is about the expiration of options contracts. What you need to know is:
One stock option is equal to 100 shares of a stock. Every option has an expiration date.
Expiration dates vary. A stock option can expire in a few days, weeks , months or even years.
As an option gets closer to the expiration date, (like milk) the option holder may be forced to buy or sell 100 shares of stock for each option contract they own .
There are many reasons why the buying and selling happens, but the big picture is that the volume of the number of shares traded increases dramatically .
And like many procrastinators, people wait until the last minute, or hour of the day, to complete their trades.
A spike in the number of shares traded creates volatility.
As time runs out the pressure builds to execute trades before the market closes at 4:00 pm.
Trading futures and options with the clock ticking away is pressure. Pressure that takes skill. Pressure that takes experience.
It may or may not involve witchcraft, but whatever it takes, it is not for the faint of heart, or beginners.
I prefer imagining three bewitching women saying:
“This is our day! This is our hour! Let’s show those warlocks what we are really capable of.”
With so few women investing, compared to the Warlocks of Wall Street, I feel honored to be represented by three extremely capable women.
Real or imaginary, a woman has been attributed with the capability to control the markets during the most challenging trading days of the years.
I don’t mind if there is a slightly negative association with witches.
To think that witches were chosen over warlocks for the all-important options expiration dates speaks to the power women can have in the markets.
I take that as a victory!
Triple witching hour – Wikipedia
“This daylong event, which is sometimes referred to as “Freaky Friday,” is an important day for short-term investors because the markets tend to be turbulent and unpredictable, shifting erratically as traders attempt to offset their orders before the closing bell rings.”
[1] The Modest Economist: The One Option You Do Not Need February 2021 – What are Options?
The Modest Economist: Tulips April 2019 – The Story of Futures Contracts
Both articles available on https://TheModestEconomist.com
Options Education – What is an Option ?
Options Clearing Corporation
Chicago Board Options Exchange
Mechanics of Option Trading, Exercise, and Assignment; Options Clearing Corporation (OCC) (thismatter.com)
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
