Daily Commentary - Posted on Monday, November 15, 2010, 8:40 AM GMT +1

5 Comments


Nov Monday 15

November Option Expiration and Year-End Rally ?

Apologies for the posting hiatus during the last week (I’m currently working on setting up a charitable project).

Today (Monday, November 15) will be the first session of  November’s option expiration week, historically a positive week for the markets, and we’re entering into the favorable (assumed you’re positioned on the long side) year-end time frame as well.

Table I below shows the SPY‘s (weekly) performance during November’s option expiration week (‘Weekly Returns‘), the number of sessions (‘No. of sessions‘), the maximum gain (‘Max. Gain‘) and maximum loss (‘Max. Loss‘) during the week (close-to-close basis), and the respective previous (‘Prev. Week‘) and next week’s (‘Next Week‘) performance, assumed one went long on close of the session immediately preceding November’s option expiration week.

(* no close below trigger day’s close during option expiration week)

Interesting to note that with respect to November’s option expiration week

  • the SPY showed a positive weekly performance on 14 out of the last 20 occurrences (or 70% of the time) ;
  • did not post a single higher close (above the trigger day’s close) during the week on only 1 out of the last 20 occurrences (means the SPY posted at least one higher close on 19 occurrences or 95% of the time), but no lower close on 6 out of the last 20 occurrences (an unfilled gap on the upside) ;
  • showed a maximum loss greater than -1.0% on only 4 occurrences, but a maximum gain greater than +1.0% during the week on 14 occurrences ;
  • posted a weekly loss greater than -1.0% on only 3 occurrences, but a weekly gain greater than +1.0% on 10 occurrences ; and finally
  • closed exactly at the weekly high (‘Max. Gain‘) on 8 out of the last 20 occurrences (and close to the maximum gain on 10 occurrences) .

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In addition, on November’s option expiration we’re entering into the favorable (assumed you’re positioned on the long side) year-end time frame.

Table II below shows all occurrences and the SPY‘s historical performance (since 01/01/1990) over the course of the then following 5, 10 , 15 , 20 and 25 sessions (at / around Christmas time), assumed one went long on close of November’s option expiration in the past.


(* no close below trigger day’s close during next 10 sessions)

Interesting to note that the SPY

  • was trading at a higher level 10 sessions (or two weeks) later on 16 out of the last 20 occurrences (or 80% of the time) – thereof the last 8 occurrences -,
  • was never trading lower greater than -2.42% (exactly) two and three weeks later, and
  • was trading at a higher level 25 sessions (or five weeks) later (at / around Christmas time) on 17 out of the last 20 occurrences (or 85% of the time), significantly better than the at-any-time chance of 59.76% for trading higher 5 weeks later.

Conclusions:

From a statistical and historical point of view, there is a good chance that after a slow start into November’s option expiration week, the market will probably gain strength during the week and might close the week not only on a positive note but on (or at least close to) the high for the week as well, and this could very well be the signal for a continuation of the recent up-move into the end of the year.

Successful trading,

Frank

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

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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 (5)

 

  1. […] This post was mentioned on Twitter by Frank Hogelucht, Al, 50 Pips, Greg Phatts, Quant Blogs and others. Quant Blogs said: Trading the Odds: November Option Expiration and Year-End Rally ? http://bit.ly/9YAEUI […]

  2. Denali92 says:

    Agree with your general view on November Opex, BUT I was surprised you did not look at the implications of Friday’s session, as it was quite a rare recent event.

    Other than May 2010, there have only been very negative Fridays the week before Opex week during the Bear market – many in 2008 and early 2009.

    To me, the real edge looks to be on the short side during the week with a low of the week quite a bit lower than the Friday before Opex week close, and the LONG side at the end of the week – Best two examples are May 2010 and Nov 2008, but there lots of other ones out there.

    THANKS!

    -D

    • TradingTheOdds says:

      Denali92,

      thanks for the suggestion.

      From a historical and statistical point of view, there is no edge on the short side of the market when the SPY closed lower at least -1.0% the Friday immediately preceding option expiration week, see http://twitpic.com/372ido/full .

      Since 1990 there were 34 occurrences, and the SPY closed higher the next day (like on Monday, November 15) on 21 and lower on 13 occurrences. There were only 3 occurrences where the SPY did NOT post at least one higher close over the course of the then following 5 sessions (during option expiration week), but 9 occurrences where the SPY never looked back and did not post a single close below Friday’s close. And I wouldn’t give the fact that the SPY was trading lower on the last 3 occurrences too much weight. Three occurrences in a row on one sight of the market is not ‘significant’.

      The chances for posting a higher/lower close 1, 2, 3, 4 and 5 sessions later after posting a loss of at least -1.0% on a Friday immediately preceding option expiration week are completely in line (almost identical) with the market’s at-any-time chances for posting a higher/lower close 1, 2, 3, 4 and 5 sessions later.

      I hope that helps.

      Best,
      Frank

  3. Denali92 says:

    Thanks for providing a study further out than I have done. I am sure I suffer from recency bias like so many other traders – as I have only been trading equities actively since 2007 and pretty much all of the case since 2007 – except for that wild October 2008 period did give you a downside edge during the beginning of the week.

    As of 2pm EST, that clearly has not happened so far.

    Thanks!

    -D

  4. Denali92 says:

    How things can change in 2 plus hours…. I am sure it is still recency bias, but it does make it a little more interesting to see a slightly down Monday.

    Have a good one,

    -D

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