Daily Commentary - Posted on Saturday, January 22, 2011, 6:47 PM GMT +1

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Jan Saturday 22

Gap on Option Expiration and 52-Week High(s)

Apologies for the posting hiatus during the last week, but I was busy doing some work for the charitable foundation. Thanks a lot and hats off to those guys (unfortunately a handful only) who already showed their generosity !

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But now back to business:

Compliant to historical probabilities and odds, the market closed out January’s option expiration week with a loss ( see Martin Luther King, Jr. Day Week and January Option Expiration Week ), but finished the week on a strong note, leaving an unfilled opening gap up (Friday’s low greater than Thursday’s close) on option expiration Friday.

There were at least two pattern worth mentioning triggered during January’s option expiration week:

  1. the SPY (S&P 500 SPDR) left an unfilled opening gap up on option expiration, but nevertheless closed out the week with a (weekly) loss, and
  2. the SPY posted a second consecutive 52-week high on Tuesday last week, without any follow-through in the Wednesday to Friday time frame.

First of all Table I below shows all occurrences (unfortunately the number is very limited) and the SPY‘s performance over the course of the then following 1 to 5 sessions (next week), assumed one went long on close of option expiration where the SPY left an unfilled opening gap up on option expiration, but closed out the week with a (weekly) loss in the past.


+ no close below trigger day’s close during period under review
no close above trigger day’s close during period under review

Although the number of occurrences is too limited to be statistical significant, it is at least worth mentioning that weakness during option expiration week regularly carried over into the then following week, and sellers normally gained the upper hand again during the second part of the then following week. The SPY was trading lower three, four and five sessions later (Wednesday to Friday time frame next week) on 7 out of up to now 9 occurrences, and was lower -1.0%+ three sessions later (in this event on Wednesday, January 26) on 7 out of 9 occurrences, but never up +1.0% three sessions later.

In addition, the SPY never posted at least on higher close above option expiration’s close during the then following week on 3 out of 9 occurrences, and upside potential was (up to now) limited to +1.40% (close to close basis).

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Although the market (SPY) has posted eight (!) fresh 52-week highs during the last month (last 21 sessions) – the last one on Tuesday, January 18, 2011 – , it was the first time since 11/5/2010 that two consecutive 52-week highs didn’t see any follow-through and were not followed by another fresh 52-week higher during the then following three sessions. A similarity to last November where the same pattern marked a short-term top (see the numbers below, occurrence #67).

Table II below shows all occurrences and the SPY‘s performance over the course of the then following 4 to 8 sessions (in this event the week from Monday, January 24 to Friday, January 28), assumed one went long on close of a second back-to-back fresh 52-week high (like on Tuesday, January 18, 2011) where the SPY didn’t manage another fresh 52-week high over the course of the then following three sessions (like during the Wednesday to Friday time frame last week) in the past.

+ no close below trigger day’s close during period under review
– no close above trigger day’s close during period under review

Without any immediate follow-through during the then following three sessions – and despite the fact that it takes a +0.88% gain only to take out last Tuesday’s 52-week high -, historically chances for a fresh 52-week high on day four and five (in this event Monday and/or Tuesday next week) are slim (1:4 and 1:3 respectively), but slightly improving to 1:2 over the course of day six to eight (Wednesday to Friday time frame next week).

But even if there is at least a 1:2 chance (33.3% probability) for another fresh 52-week high during the next week, upside potential was almost always more than limited. The market was never trading 1.75%+ above the previous 52-week high between day four and day eight (in this event a potential maximum of 131.74 for the SPY during the next week) – although the market closed higher 1.0%+ eight days later on 8 out of 67 occurrences – , but closed lower -1.0% eight days later on 29 out of 67 occurrences (equals 128.22 for the SPY), and lower -2.0%+ on 13 occurrences (equals 126.92 for the SPY).

Conclusions:

With respect to historical probabilites and odds concerning the market’s performance on option expiration, and the SPY‘s inability to show some follow-through after Tuesday’s 52-week high, a short-term top could be in, and the market may be prone to some additional profit taking over the course of the next week.

But please don’t forget: We’re trading probabilities, not certainties, and recently the market has shown a stunning capability and did what it tends to do best: to surprise the majority (for a potential break-out to the upside) the moment when they expect it least.

Successful trading,

Frank

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

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Remarks: Due to their conceptual scope – and if not explicitly 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.

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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 (2)

 

  1. […] This post was mentioned on Twitter by Frank Hogelucht, Quant Blogs. Quant Blogs said: Trading the Odds: Gap on Option Expiration and 52-Week High(s) http://bit.ly/h4x58C […]

  2. […] on the economy, the capital markets and their listed companies. Find More BARRICK GOLD Articles I have seen many surprising monthly option expirations and when combines with Index re balances ca…ng TV and most likely the traders around the US.Stocks drifted higher Friday after a rise in gold […]

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