Daily Commentary - Posted on Sunday, October 10, 2010, 9:45 AM GMT +1

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Oct Sunday 10

Columbus Day and Option Expiration Week

On Friday’s session everything went according to plan ( see my posting Job Report Friday and 3-Month High , ‘… Therefore any weakness before (after the jobs report release) the open or early in the session might provide an intraday buying opportunity, targeting higher prices into the close.‘).

ES E-mini (S&P 500) futures gapped lower immediately after the release of the BLS Employment Situation, but had already recouped all of it’s losses at the start of the regular session, and climbed steadily higher during the session to finish the session almost at the high.

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Monday will be Columbus Day (actually Oct. 12, but celebrated on the 2nd Monday in October since 1971; exchange holiday every year 1909-1953; the bond market is closed), which historically has a remarkable bullish bias (probably due to the near completely absence of institutional market participants and any potential selling pressure – the bond market is closed, as well as banks and the government – ).

Since 1971, the S&P 500 closed higher on 26 (or 66.67% of the time) and lower on 13 occurrences (Columbus Days), and shows a Profit Factor of 4.72, a Geometric Growth per Trade of  0.6231%. 20.51% (or 8) of all occurrences were among the Top 10% Winners (the top percentile of at-any-time returns) while only 2.56% (or just 1) were among the Top 10% Losers (the bottom – or the worst – percentile of at-any-time returns),  and shows a Maximum Drawdown of 1.38% only (assumed one would’ve been invested on Columbus Days only). Out of 39 occurrences, the S&P 500 lost more than -1.0% only once.

Table I below shows all occurrences and the S&P 500’s historical performance (since 01/01/1971) over the course of the then following 1 , 2 , 3 , 4 and 5 sessions ( and the minimum number of sessions – if any – until the S&P 500 posted a higher close – ), assumed one went long on close of a session immediately preceding Columbus Day (like on the close of Friday, October 8, 2010; ‘next session‘ represents Columbus Day).


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

In addition, historically its not only Columbus Day but ruther the week which starts with Columbus Day which shows a (at least slightly) bullish bias as well (regularly equals October’s option expiration week, see the lower part of the posting). On 16 out of 39 occurrences (or 41.03% of the time), the S&P 500 never looked back and did not post a single close below the trigger day’s close over the course of the then following 5 sessions, significantly better than the respective at-any-time (random) chance of 27.43% for not posting a lower close over the course of the next 5 sessions.

For those seeking intraday trading opportunities as well, Table II below shows all historical occurrences (Columbus Days) and the SPY‘s (S&P 500 SPDR) respective intraday performance (since 01/01/1990) on the open (open vs. previous close), during the end of first hour of the session (1st hr. vs. open), during the middle part of the session (last hr. vs. 1st hour), during the last hour of the session (close vs. last hr.) and on the close (close vs. prev. close).

On Columbus Day, the SPY was trading above the open at the end of the first hour of the session on 16 out of the last 20 occurrences (or 80% of the time) – and never lower than -0.26% – , but regularly gave back at least parts (sometimes all and then some) of its early gains during the middle part of the session, trading below the end of the first hour on 14 out of the last 20 occurrences (or 70% of the time). Therefore any strength during the first hour of Monday’s session might provide an intraday selling opportunity, targeting lower prices at (or around) the start of the last hour.

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Next week will be option expiration week as well. Historically, October’s option expiration week shows a (slightly) positive bias.

Table III below shows the S&P 500‘s weekly 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)) during October’s option expiration week (‘OE (OCT)‘), during any option expiration week except October (‘OE (~=OCT)‘), in comparison to at-any-time returns during the same time frame (and since 1990 as well).

The S&P 500’s chances for closing out October’s option expiration week on a positive note (61.11%) exceed those with respect to any other option expiration week (57.28%) and the random chance for a positive week as well (56.02%), and the median weekly return for October’s option expiration weekly (+0.84%) more than doubles the respective return for any option expiration week except October (+0.41%), and the at-any-time median weekly return of +0.30% as well.

And last but not least Table IV below shows the S&P 500′ performance metrics for the first session of October’s option expiration week in comparison the first session of any other (except October’s) option expiration week. You’ll probably notice at a glance that probabilities and odds are heavily lopsided on the upside (a 69.44% probability for a higher close, a profit factor of 5.43, and and and), but this is mainly due to the fact that the first session of October’s option expiration week regularly equals Columbus Day on the 2nd Monday of October. But its nevertheless noteworthy that even with respect to any option expiration week except October, the first session during an option expiration week shows a remarkably positive bias (a 61.73% probability for a higher close, a profit factor of 1.30, …).

Conclusions:

We might see some further upside on the open and during the first part of Monday’s session and probably get a(nother) higher close as well, but some weakness during the middle part of the session, providing a buying opportunity on any weakness before or right at the open, and a short-term opportunity on the short side of the market approximately – and in the event of – higher prices at the end of the first hour of Monday’s session targeting lower prices at the start of the last hour.

Successful trading,

Frank

Disclosure: No positions in the securities mentioned in this post at time of writing.

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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), 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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Disclaimer

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.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

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

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Comments (1)

 

  1. […] This post was mentioned on Twitter by Frank Hogelucht, Larry Smith. Larry Smith said: Columbus Day and Option Expiration Week | TRADING THE ODDS http://t.co/wUjIKJC […]

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