Daily Commentary - Posted on Friday, September 17, 2010, 10:34 AM GMT +1

3 Comments


Sep Friday 17

Gaps on Option Expiration

With futures (E-mini S&P 500) currently up +0.80% at time of writing, the S&P 500 is on the verge of leaving an unfilled (opening) gap up on today’s option expiration session (at the same time triple witching).

Although (see my respective twitter update) the market historically shows a positive tendency on September’s option expiration (13 higher and 7 lower closes since 1990, thereof up on the last 6 occurrences), an (unfilled) opening gap up (today’s low gt. previous close) or especially an unfilled gap up (today’s low gt. previous high) would’ve (significantly) negative implications for the market’s performance on Monday, September 20 and over the course of the then following week as well (on top of September’s seasonal tendency for trading lower the week immediately following option expiration, see September’s Triple Witching).

With respect to leaving an unfilled opening gap up on option expiration, Table I below shows the S&P 500‘s respective performance (since 1974; in 1973 standardized exchange traded call options were released for trading by the Chicago Board of Options Exchange (CBOE) and the Options Clearing Corporation (OCC)) over the course of the then following 1 3 and 5 sessions as well as the minimum number of sessions until the S&P 500 posted it’s first close above | below the trigger day’s close (in this event the close on Friday, September 17).


( * = no close below the trigger day’s close during next 5 sessions )

Since 3/21/1997 (24 occurrences) the S&P 500 posted at least one close below the trigger day’s close 1, 2, 3 or 4 sessions later on 23 out of those 24 occurrences (or 96% of the time), significantly above the at-any-time probability of 69.02% for posting at least one lower close over the course of the then following 4 sessions. With respect to the last 20 occurrences, the S&P 500 gained more than +0.50% on the then following session (like on Monday, September 20) only once, but losses were regularly limited as well.

In addition: When the S&P 500 left an unfilled gap up (today’s low gt. previous high) on option expiration in the past (7 occurrences, those dates were 08/21/2009, 09/19/2008, 04/18/2008, 12/21/2007, 06/17/2005, 10/15/1993 and 12/18/1992), the S&P 500 closed lower the next session on 6 out of those 7 occurrences, and was always trading at a lower level at least once over the course of the then following 3 sessions. One week later, the S&P 500 was trading at a higher level on only 2 out of those 7 occurrences, and did never close better than +0.89% above the trigger day’s close during the then following week.

Conclusions:

On top of September’s seasonal tendency for trading lower during the week immediately following option expiration, and if history gives any guidance, today’s potential (opening) gap up increases probabilities and odds that the market will probably consolidate some of it’s recent gains over the course of the next week.

Successful trading,

Frank

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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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(Data courtesy of MetaStock , and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

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Comments (3)

 

  1. […] This post was mentioned on Twitter by Darren Miller, Nikos Markoulakis. Nikos Markoulakis said: RT @Attitrade: $SPX Gaps on Option Expiration | TRADING THE ODDS http://bit.ly/aM2vks […]

  2. Predator says:

    Hi Frank,

    I would add to your recent post regarging triple witching bearish bias, an older one highlighting the bearish bias ins the session following spy ex-dividend day (next monday).

    • TradingTheOdds says:

      Predator,

      thanks a lot or the hint.

      The SPY’s ex-dividend days are always the 3rd Friday’s of March, June, Spetember and December, identical to triple witching, so it wouldn’t make a difference.

      Best,
      Frank

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