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Answer:
Dear
BuyandHolder,
Your
source is correct -- the Triple Witching Hour will
appear this month. However, if you are a long term
investor, a buy-and-hold type, you don't need to be
terribly concerned. Here's why...
When...
The Triple Witching Hour happens only four times a
year -- on the third Friday of March, June, September
and December. More specifically, it takes place during
the last hour of the stock market trading session
on those particular days.
What...
The word "triple" in the phrase refers to the fact
that on these four dates, three types of investment
contracts expire: contracts on stock index futures,
on stock index options and on individual stock options.
How...
To fully understand the Triple Witching Hour, you
need to know a little bit about how options work.
Options
are a type of security and they trade on the exchanges
at fluctuating prices. They give the owner the right
to buy or sell a specified number of shares of a security
at a fixed price (also known as the strike price)
for a specific time period. If the option is not exercised
before the expiration date, the price the investor
paid for the option is forfeited.
The
specific asset that an option deals with, such as
a stock, an index, a Treasury, a currency or a futures
contract, is called the underlying investment.
There
are many types of options but the two most popular
are call options and put options.
If
you buy a call option you're betting that the
price of the underlying investment will go up. Let's
say you buy a call option for XYZ, Inc. This gives
you the option of buying XYZ stock at a given price
for a stated time period.
If you buy a put option, you're betting that
the price of the underlying asset, in our example,
XYZ, will go down within the stated time period, that
is before the option expires. The value of a put increases
the more the stock declines in price.
In
both cases, whether it be a call option or a put option,
your potential loss is limited to the dollar amount
you paid to buy the option.
Expiration
dates...
All
options and futures have expiration dates -- the dates
when the contracts must be exercised or be allowed
to expire. The simultaneous expiration of these contracts,
during the Triple Witching Hour, can set off heavy
trading, not only of the options and futures but also
the underlying securities.
However,
unless you're into options or are trading in any of
the underlying assets on the Triple Witching Hour
day, you will experience minimal impact.
More
info...
The
Options Industry Council has a very sophisticated
article in its Frequently Asked Questions (FAQ) section
at: www.optionscentral.com.
Good
luck!
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