Daily Commentary - Posted on Tuesday, June 16, 2009, 1:18 PM GMT +1

4 Comments


Jun Tuesday 16

Option Expiration Weeks and (Big Down Days on) Mondays


A preliminary note:
Due to the fact that I regularly won’t be able to prepare a posting with stats and tables during the final minutes of the regular session (which was -understandably- desired by some of my readers), and if you’re interested in if a buy/sell signal will be triggered concerning the next session, I highly recommend to subscribe/follow me directly by Twitter. I’ll regularly try -if any tradable edge is provided- to tweet the respective signal (and motive) during the final hour of the regular session.

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This week is option expiration week, and a reader raised the question if -and to what extend- this might provide a tradable edge (if any) and what will be my forecast for the remainder of the week.

Due to the fact that we started into the week with a big down day on Monday (the SPY closed lower -2.28%), I thought it would be interesting to additionally check for those occurrences when the S&P 500 started into the option expiration week with a lower close at least -2.0% than the previous session’s close (regularly the Friday before).

I therefore checked for the following setups which were triggered on Monday’s close (strategy: ‘buy on close; sell on close 4 days later, means on close of (option expiration) Friday‘):

  • Monday during (at the start of) option expiration week (Setup S1),
  • Monday at the start of a week which is NOT option expiration week (means any other Monday than those concerning setup S1) (Setup S2),
  • Weekday = Monday (all Mondays, either S1 OR S2) (Setup S3),
  • Monday during (at the start of) option expiration week, and the S&P 500 closed lower at least -2.0% (Setup S4), and
  • Monday at the start of a week which is NOT option expiration week, and the S&P 500 closed lower at least -2.0% (Setup S5).

Table I shows the ES (S&P 500 E-MINI) performance (since 01/02/1990) over the course of the next four sessions (in this event Friday, June 19) immediately following those sessions where setups S1 to S5 listed above had been triggered.

20090616-ES-OE-S1-5

It is especially remarkable that

  • concerning the chances that the ES (S&P 500 E-MINI) will close high/lower on option expiration as well as regarding the respective profit factor (expectancy, pay-off), buying on close of a (any) Monday during option expiration week doesn’t privide any (significant) edge, and probabilities and odds almost match the respective at-any-time probabilties and odds to the point,
  • the latter applies to thoses Mondays at the start of a week which is NOT option expiration week as well (although with respect to the probabilities and odds for a higher/lower close on the then following Friday they slightly undercut the respective probabilties and odds of those Mondays during option expiration week), but
  • there is a significant deviation (although sample sizes are way too small to read any statistically relevant into it) concerning both setups when the S&P 500 closed lower at -2.0% on the respective Monday: Buying on close of a Monday at the start of a week which is NOT option expiration week provides a significant edge on the long side concerning both the probability for a higher close on the then following Friday and profit factor as well (the profit factor triples the respective at-any-time profit factor), while selling short on close of a Monday at the start of a week during option expiration provides a significant edge on the short side concerning both the probability for a lower close on option expiration Friday and profit factor as well.

Table II now shows the ES (S&P 500 E-MINI) performance (since 01/02/1990) over the course of the next four sessions (in this event Friday, June 19) immediately following those 9 sessions where setup S4 (‘Monday during (at the start of) option expiration week, and the S&P 500 closed lower at least -2.0%‘) had been triggered.

20090616-ES-OE-S4i

Concerning setup’ S4 (‘Monday during (at the start of) option expiration week, and the S&P 500 closed lower at least -2.0% ‘) it is especially remarkable that

  • chances (7 out of 9 occurrences) that the ES (S&P 500 E-MINI) will close higher and the respective profit factor (14.44) on the then following session (in this event Tuesday, June 16, 2009) significantly exceed the at-any-time probability and profit factor for a higher close the then following session, but
  • concerning the remainder of the week the outlook is bleak (to say the least), and although chances for a higher/lower close on option expiration Friday are more or less even, the profit factor significantly undercuts the respective at-any-time profit factor for a higher close 4 sessions later.

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Bottom line:

With respect to Tuesday’s session and based on the respective probabilities and odds concerning those setups which were triggered on Monday’s close (see my post Trading the Odds on Tuesday – June 16, 2009), the outlook is short-term (Tuesday’s session only) positive, and any weakness on or shortly after the open will probably provide a short-term buying opportunity especially with respect to a potential intraday high on Tuesday’s session significantly above Monday’s close, but this will apply -although to a lesser extent (profit factor)- to a potential higher close and close versus open as well.

BUT with respect to the remainder of the week, it seems highly probable that not only a sell signal concerning Wednesday’s session will be triggered at today’s (Tuesday’s) close -especially in the event if we get a higher close on a relatively weak breadth-, but the edge will regularly be on the short side of the market.  So at least concerning those setups listed above is seems wise to not overstay one’s welcome on the long side of the market beyond Tuesday’s session.

Successful trading,

Frank

P.s.: I’ll regularly make some intraday updates as well using Twitter. If you’re interested in, please have a look at the blog during the trading session as well or subscribe directly to Twitter (recommended).

Disclaimer: Long DAX (German Stock Index) and short volatility.

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Comments (4)

 

  1. moneyfriend says:

    Thanks for sharing this study Frank!

  2. JLD says:

    Great report Frank! Thanks for the info.

  3. ADD says:

    Dear Frank,

    Thank you for the outlook. Previously I was considering BGU today once the gap closed, but instead I’ll be patient to watch today’s fireworks before going long BGZ with the right sell signal. Much appreciated.

    Thank you,
    -A.

  4. Glen says:

    Absolutely a great site and great info. I look forward to reading every night!

    Thanks for your hard work!

    -G

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