Though the phrase is thought to have originated with the witches in Shakespeare's Macbeth, a triple witching day has nothing to do with spells or cauldrons and everything to do with stocks and closing bells. It is a financial term, referring to the last day of the quarter when contracts for stock options, index options, and future options all expire at the same time. Triple witching days take place on the third Friday of every third month, in March, June, September, and December.
During a triple witching day, investors and traders have to decide whether to sell their options or roll them over to the next quarter. If they haven't taken action before the end of "expiration Friday," the stock will typically become worthless. As a result, the volume of stocks traded on these days increases dramatically.
With so many options being bought and sold and rolled over so quickly, the value of these options often fluctuates. In fact the value of stock options may rise or fall for days before expiration Friday, as traders prepare for what's to come. As with all market changes, these price fluctuations can means good news or bad news for investors.
The trading volume and volatility, or how quickly a security changes in value, is particularly high during the final hour of trading on the triple witching day. This time, currently 3 to 4 p.m. Eastern Standard Time, is known as the triple witching hour. It is when the Hollywood scene of shouting and signaling on Wall Street floors is at its best, as traders scramble to settle before the closing bell.
Though intense for day traders, triple witching day generally has little impact on long-term investors. In fact, experts advise buy-and-hold investors to ignore this day. They argue that most fluctuations will rebalance after a week or so, and that getting caught up in the excitement of that day's trading could lead to unwise decisions.
Many experts also argue that this day is becoming less dramatic than its name implies for several reasons. The first is that the industry has been taking steps to minimize the ensuing chaos, including spreading out the expiration dates of contracts to have some fall at the beginning of the month. Experienced traders are also settling before a contract ends, minimizing the volume shuffled on triple witching day.
Another reason that triple witching day, also called "Freaky Friday," is becoming less meaningful is that the end of the quarter has actually now become a quadruple witching day. This is because single stock futures — bundles of one type of stock, with traders gambling on their future value — also expire on the third Friday of the third month. This fourth option was introduced to the American trading market in 2002.