Daily Commentary - Posted on Friday, September 17, 2010, 10:34 AM GMT +1
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).
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.
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.
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 and/or interest on margin, 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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