Daily Commentary - Posted on Friday, August 20, 2010, 8:51 AM GMT +1

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Aug Friday 20

SPY's Option Expiration Seasonalities

Ahead of Friday’s option expiration the SPY (S&P 500 SPDR.) posted a serious down-day, losing -1.74% on the close.

Table I below shows the SPY‘s performance (since 01/01/1990) on option expiration assumed one went long on close …

  • Strat. #1: of a(ny) session immediately preceding option expiration,
  • Strat. #2: of a(ny) session when the SPY had lost at least -1.50%,
  • Strat. #3: of a session when the SPY had lost at least -1.50% immediately preceding option expiration (like on Thursday, August 19, 2010).

Table II below shows all historical occurrences (the SPY‘s performance on option expiration) and their respetive returns, assumed one went long on close of a session when the SPY had lost at least -1.50% immediately preceding option expiration (Strat. #3):

From my perspective a favorable mean-reversion tendency on option expiration looks quite different (in contrast to the SPY‘s overall mean-reversion tendency after posting a down-day of that magnitude, see Strat. #2). On almost two out of every three (11 out of 17) occurrences (Strat. #3), the SPY posted another down-day on option expiration, and it is a single occurrence on 11/21/2008 (+5.39%) only which turns the compound return and profit factor into a positive number.

Option expiration – from a statistical and historical perspective –  seems to be a session where generally a long trade is a trade against the odds:  although the percentage of winning trades is slightly positive (51.85%), the distribution of returns (a ranking of a setup’s returns in comparison to at-any-time returns) undercuts the at-any-time median return of a buy-and-hold approach, and only 6.58% of the SPY‘s returns on option expiration fall into the top tenth of the SPY‘s at-any-time top tenth (best) returns (disproportionally small), while 10.70% fall into the bottom tenth of the SPY‘s at-any-time bottom tenth (worst) returns, slightly above-average.

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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The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

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