In the context of the stock exchange, the witching hour refers to a specific event that occurs on the third Friday in the months of March, June, September and December, between 12:00 noon and 4:45 pm. At these times, futures and options on stock indexes and shares mature simultaneously, producing large volumes of transactions that can affect the value of the underlying assets.
In the United States, this phenomenon is known as the “triple witching hour”, or “Freaky Friday”, when three types of maturity coincide: index futures, index options and stock options. In the American market there are no stock futures; however, in countries such as Spain, stock futures do exist, and so the three aforementioned maturities are joined by a fourth, creating what is known as the “quadruple witching hour”. Additionally, in the case of the Spanish stock exchange (and unlike in other countries) the maturities occur monthly, which means there is no need to wait until the end of each quarter.
Remember that a future is a standardised derivative contract in which two parties agree to exchange an asset (e.g. raw materials, currencies, stocks or indexes) at a price that is fixed today, although the asset will be delivered and the payment will be made on a set date in the future. When we enter into a futures contract, we must decide whether we want to take a long position (we buy) or a short position (we sell). The buyers seek to purchase an asset at a fixed price today in order to sell it for a higher price in the future; in other words, they think that the value of the underlying asset will rise. In contrast, those who are selling the futures agree to deliver the underlying asset upon maturity, in exchange for the price agreed in the contract and with the aim of buying the underlying asset more cheaply. Unlike futures, options are more complex. The main difference when buying and/or selling a call and/or put lies in the role you are playing in the contract: if you buy, you pay a premium in order to acquire a right (but not an obligation); and if you sell, you take on an obligation in exchange for receiving payment of the premium. In the case of calls, you have the right (if you buy) or obligation (if you sell) to purchase an asset at a fixed price (the strike price) before a particular date. In the case of puts, you acquire the right (if you buy) or obligation (if you sell) to sell an asset at a fixed price (the strike price) before a particular date.
In either situation, the buyers or sellers of futures and/or options contracts must perform the opposite transaction to the one they performed initially in order to close their position. For example, if an investor has opened a buy position by acquiring a future, they will close it by selling the future at a later date. This closure may take place at any time prior to the maturity of the contract; however, when the maturity date arrives, all of the positions will close automatically. Moreover, investors can also choose to close the position and open another of the same kind in order to maintain their exposure to the market; this is known as “rolling over” a futures contract. Both closing a position and rolling over a contract help to increase the trading volume in the market, and often contribute to spikes of volatility in the price of the underlying assets.
With the automation and digitalisation of the markets, the impact of the witching hour has been significantly reduced. Nowadays, position adjustments tend to be spread throughout the week prior to the maturity, instead of being concentrated in a single day. However, it is a phenomenon that any current or future investor needs to be aware of: understanding why the market sometimes moves without any obvious reason is the first step in learning not to make knee-jerk decisions when such movements happen.
Diari d’Andorra 10.06.26
