Definition
The “witching hour” in finance refers to the final hour of the stock market trading session, typically between 3 and 4 p.m. EST on Wall Street. It’s often characterized by high volatility and heavy trading volume due to traders closing their positions at the end of the trading day. This can have a significant impact on the prices of stocks and commodities.
Phonetic
The phonetic transcription of “Witching Hour” in the International Phonetic Alphabet (IPA) is: /ˈwɪtʃɪŋ ˈaʊər/
Key Takeaways
<ol> <li>Witching Hour is a term used in folklore to refer to the time of night when creatures such as witches, demons, and ghosts are believed to be at their most powerful and to be able to communicate with the living. This time is typically midnight or 3 am.</li> <li>In the financial markets, Witching Hour refers to the last hour of stock trading on the third Friday of every month when options and futures contracts expire. This can lead to increased volume and volatility in the markets.</li> <li>The Witching Hour is also a novel written by Anne Rice. It’s the first in a series about a family of witches, and explores themes of love, power, and supernatural abilities.</li></ol>
Importance
The business/finance term “Witching Hour” is important as it refers to the last hour of stock trading, typically between 3:00 PM and 4:00 PM EST on the third Friday of every month. This is when stock market derivatives (options and futures) expire, often leading to increased trading volume and volatility. The simultaneous expiration can induce significant price fluctuations due to investors rebalancing their holdings or covering their positions, which can offer both high risks and high rewards to traders. Understanding the “Witching Hour” can hence be critical for investors to plan their trading strategies accordingly and navigate the potential market turbulence during this period.
Explanation
The term “Witching Hour” in the world of finance refers to a specific time near the close of the trading day where futures and options contracts are nearing their expiration. This occurs on the third Friday of every March, June, September, and December. The purpose of this is to provide an opportunity for portfolio rebalancing and allows traders to close out positions that are set to expire, often resulting in increased trading volume and volatility.The Witching Hour is used as an opportunity by investors to manage their investment strategies. As the contracts draw closer to expiration, the options may become more or less valuable depending on the underlying asset’s price, directly impacting a portfolio’s risk and return metrics. Therefore, traders utilize this event to make any necessary adjustments to their portfolios in response to these variations. It’s important to note that although the Witching Hour can produce rapid, short-term market fluctuations, it doesn’t necessarily impact the broader trend of the market.
Examples
The term “Witching Hour” in business and finance refers to the last hour of the stock trading which consists of a high amount of trading and volatility. Here are three real-world examples:1. Stock Market Close: The most common example of witching hour is the last hour of the trading day, typically between 3:00 – 4:00 PM EST on the NYSE and NASDAQ when a heightened amount of trading typically occurs. 2. Quadruple Witching: Another example happens on the third Friday of every March, June, September, and December. This is referred to as “quadruple witching,” because on this day, market index futures, market index options, stock options, and stock futures expire, often resulting in elevated volumes and possible increased volatility.3. Triple Witching: Triple Witching refers to the quarterly expiration of index futures, index options, and stock options. This occurs on the third Friday of March, June, September, and December, the same as quadruple witching, but does not include stock futures. This can lead to significant volume and potential volatility as traders adjust portfolios for the new contracts.
Frequently Asked Questions(FAQ)
What is the Witching Hour?
The Witching Hour is a term used in finance and business to describe the last hour of stock trading on the third Friday of each month, when stock options, index futures, and index options expire simultaneously.
Does the Witching Hour affect the stock market performance?
Yes, the Witching Hour is often associated with a rise in trading volume and increased market volatility due to the larger-than-usual number of trades happening within that short time period.
When exactly does the Witching Hour happen?
The Witching Hour typically takes place between 3:00 p.m. to 4:00 p.m. Eastern Standard Time on the third Friday of every month.
What is the significance of the Witching Hour for investors?
For investors, the Witching Hour can offer trading opportunities due to the possibly enhanced volatility and volume. However, this period also comes with higher risks due to unpredictable price movements.
Is the Witching Hour the same thing as Triple Witching or Quadruple Witching?
The term Witching Hour is often used interchangeably with Triple Witching or Quadruple Witching. However, while all refer to the same time period, they differ in the number of financial products involved. Triple Witching refers to the simultaneous expiration of stock options, stock index futures, and stock index options; Quadruple Witching adds the expiration of single stock futures.
Why is it called the Witching Hour?
The term Witching Hour comes from the word bewitched, due to the potential for unusual market behaviors around this time. The simultaneous expiration of various financial instruments can lead to increased trading activity, and potentially wild, unpredictable price swings.
Do all markets experience the Witching Hour?
The Witching Hour primarily affects the U.S. markets, but its effects can be felt in financial markets around the world due to interconnected trading systems.
Related Finance Terms
- Triple Witching: An event that occurs when the contracts for stock index futures, stock index options, and stock options all expire on the same day.
- Quadruple Witching: The concurrent expiry of stock index futures, stock index options, stock options, and single stock futures on the third Friday of March, June, September, and December.
- Derivatives: Financial contracts whose value is linked to the price of an underlying commodity, asset, rate, index or the occurrence or magnitude of an event.
- Options Contract: An agreement that gives the holder the right to buy or sell an underlying asset or security at a specified price on or before a specified date.
- Futures Contract: A legal agreement to buy or sell a particular asset or commodity at a predetermined price at a set date in the future.
