Expiration

What is triple witching hour?

Triple witching is the third Friday of March, June, September and December. On this day, options, index futures and options on index futures expire concurrently. Massive trades in options and underlying stocks by hedge strategists and arbitrageurs can cause above average volume and added market volatility.

Derivative contracts based on stock indices do not generally involve the actual exchange of any underlying security. Instead, they are cash settled based on fair market value at a specified time. Many arbitrage strategies involve simultaneous, offsetting transactions in a basket of stocks representing an index and a derivatives contract on the index. When the derivatives contract reaches expiration, the usual practice is to buy or sell the basket of stocks at the exact price used for cash settling the derivatives contract.

In the early 1980's when organized futures and options exchanges began trading standardized contracts based on stock indices, that final value of those indices for cash-settlement purposes was usually the close of trading on the third Friday of the month.

Every month there is expiration on options and options on the futures. However, expiration of the futures only occurs once a quarter. This is where a large portion of the arbitrage activity takes place. So on the third Friday of the last month of each quarter, orders to buy or sell huge quantities of stock at exactly the closing price used for cash settling the derivatives contracts deluge the stock exchanges. The industry began to call this combined expiration of options, futures and options on futures the triple witching hour.

Because these arbitrage strategies were market-neutral and simply took advantage of price discrepancies between the index and derivatives on the index, they didn't represent any real opinion on the market's direction. Unwinding only one side of the strategy with a market order and letting the other side cash-settle sometimes caused huge gyrations in the markets during the final hour of trading on the third Friday of that month.

Eventually, many expiring contracts switched from using Friday's closing price to using opening price or trading range for each of the component stocks to determine settlement values. This lessened pressure for immediate execution at any price. It also allowed for delayed openings due to order imbalances at exchanges with such procedures.

While the triple expiration of options, futures and options on futures can still impact how the market opens on that day, today we rarely observe the kinds of gyrations that routinely occurred in those early days.

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Why do options expire on the third Friday of the month?

Technically speaking, standardized monthly options expire on the Saturday following the third Friday of the month. Equity, ETF and index options expire on this day because it offers the least number of scheduling conflicts (i.e., holidays).  However, the exchanges have introduced other products such as weekly and quarterly options, so each investor will want to be sure that they know the exact expiration date and last trading date of the option they intend to trade. 

Investors are welcome to view a copy of OCC's expiration calendars

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What happens to options expiration if it falls on a holiday?

When an options expiration date falls on a holiday, all trading dates move forward. For example, if the expiration falls on Good Friday, monthly options expire on Saturday following Good Friday. However the last trading day for equity options will be the Thursday preceding Good Friday. The last trading date for many broad-based index products will be Wednesday. For some index products, the opening prices on Thursday morning may determine the settlement value.

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There has been talk about OCC moving the expiration processing for standard monthly options expiration from Saturday to Friday. Will that affect the expiration date of the options?

​No, options that are currently listed will maintain their expiration dates, even though processing will occur on Friday. In June 2013 the options industry moved the standard monthly expiration processing from Saturday morning to Friday evening. This change allowed for the industry coordination of all product expiration types (Standard, Quarterly & Weekly) to one repeatable expiration process. Each investor should ensure that they are aware of the expiration date for each contract they trade.

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