Daily Commentary - Posted on Saturday, August 21, 2010, 9:38 AM GMT +1

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Aug Saturday 21

Option Expiration and Down-Days

In full compliance to historical probabilities and odds (see SPY’s Option Expiration Seasonalities), the SPY posted another down day on option expiration, on a back-to-back session to Thursday’s serious down-day (-1.74%). In addition, trading lower (than the previous session’s close) at the start of the final hour of option expiration’s session (see my Twitter Feed), (compliant to historical odds) the SPY was not able to recoup more than +0.50% of it’s intraday losses and couldn’t turn an intraday loss into a gain.

Table I below shows the SPY‘s performance (since 01/01/1990) on thoses sessions immediately following option expiration (in this event the session on Monday, August 23, 2010) assumed one went long on close …

  • Strat. #1: of a(ny) option expiration session,
  • Strat. #2: of a(ny) option expiration session when the SPY closed lower ,
  • Strat. #3: of a(ny) option expiration session when the SPY closed lower on a back-to-back session (two consecutive lower closes),
  • Strat. #4: of a(ny) option expiration session when the SPY closed lower on a back-to-back session (two consecutive lower closes), but reduced it’s losses on option expiration (a smaller loss than the one of the previous session).

All four setups were triggered on close of Friday, August 20, 2010.

There seems to be something special with those session at and/or around option expiration. Although at-any-time historical probabilities show a positive (short-term mean-reversion) tendency on a session immediately following a serious down day (e.g. SPY lost at least -1.50%) and/or following two consecutive down-days, not so on and immediately following option expiration. Long-term probabilities (winning percentage) and odds (expectancy) are (partly significantly) tilt in favor of another (a third) lower close, but at least most recent occurrences show a remarkable positive tendency.

Table II below shows the most recent twenty historical occurrences (the SPY‘s performance on a session immediately following option expiration) and their respective returns, assumed one went long on close of an option expiration session when the SPY closed lower (Strat. #2):

With respect to setup #2, the SPY closed higher on all of the most recent nine occurrences, and higher on 16 out of the last twenty occurrences, with thirteen out of those sixteen gains exceeding +0.50%.

Although long-term probabilities and odds are tilt in favor of a potential third lower close on Monday’s session, and not taking into account volume and/or market breadth data but closing prices alone, time-weigthed (most recent) probabilities and odds favour a positive outcome (a higher close) on Monday, August 23,2010.

Successful trading,
Frank

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Disclaimer: No position in the securities mentioned in this post at time of writing.

Remarks: Due to their conceptual scope – and if not explicitely stated otherwise , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in, do not use leverage (e.g. leveraged ETFs) but a marginable account is mandatory , do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility) , do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).

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