Gap on Option Expiration and Follow Through

The SPY (S&P 500 SPDR) left an unfilled opening gap up (a low above the previous session’s close) on Friday’s option expiration, and defied all historical probabilities and odds and gained another+0.57% on today’s session. But leaving an unfilled opening gap up on option expiration and closing higher on the then following session didn’t bode well for the markets performance over the course of the then following five sessions in the past.

Table I below shows all occurrences (since 1990) and the SPY‘s performance over the course of the then following 1 to 5 sessions, assumed one went long of a session where the SPY had closed higher on a session immediately following option expiration where the SPY had left an unfilled opening gap up on option expiration 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

The market regularly closed slightly lower on the then following session (in this event on Tuesday, January 25) – but never up or down greater than +/- 1.0% – , but closed lower -1.0% three and four sessions later on 6 and 9 out of 20 occurrences (almost 50% of the time), but was never up 1.0%+ . Maximum gain one week later was +1.13%, with three occurrences posting a gain 1.0%+, but 8 occurrences with a loss of -1.0%+ .

Conclusions:

Although the trend is up, at least historical probabilities and odds are tilt in favor of a short-term consolidation of recent gains over the course of the remainder of the week.

Successful trading,

Frank

 

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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.

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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