What Is Double Witching?
Double witching refers to the expiration on the same day of options contracts for single stocks and for equity indexes.
Double witching takes place on the third Friday of each month except for March, June, September, and December. During those months, index futures also expire on the third Friday, turning the occasion into a triple witching.
- Double witching occurs when two different categories of options contracts—for stocks and stock indexes—expire on the same day.
- It occurs every third Friday of each month except for March, June, September, and December, which see triple witching because futures contracts also expire on those days.
- Double witching days can result in increased trading volume—at the market open as a result of index options expirations and in the final hour of trading ahead of the expiration of stock options.
How Double Witching Works
Double witching is notable because the monthly options expirations increase stock market trading volume as market makers and other options sellers liquidate stock positions hedging the expiring contracts.
Like triple-witching Fridays, double-witching ones boost trading volume at the market open, though the bump is not nearly as large.
Stock market trading volume increases in the morning on third Fridays because many monthly index option derivatives settle that morning (along with index futures on triple-witching Fridays), prompting the selling of hedges in the underlying stocks.
The trading volume surge connected to derivatives settled that morning is followed by another in the final hour of market trading on third Fridays attributable to the expiration at the end of the day of monthly stock options (along with weekly ones). The stock option expirations also prompt the liquidation of hedges in the underlying stocks as well as transactions tied to the exercise of in-the-money options.
Most index options and futures are cash-settled in the morning, spurring stock market trading volumes at the open, while stock option expirations at day's end boost trading in the final hour and at the market close.
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.
Double Witching vs. Triple Witching
Double witching is just like triple witching, with one notable difference. Triple witching occurs when stock options, stock index options contracts and stock index futures all expire on the same day. Triple witching only takes place four times every year—on the third Friday in March, June, September, and December. Rebalancing by some indexes on triple witching days provides another spur to trading.
Double witching occurs on the third Friday of the eight months without index futures expirations. On double witching days, the expiring contracts are options on stocks and stock indices.