Daily Commentary - Posted on Thursday, January 12, 2012, 5:29 PM GMT +1

2 Comments


Jan Thursday 12

SPX at Multi Month High before OpEx

Next week will be option expiration week, and the S&P 500 is currently trading at (or close to) a multi-month high.

Therefore I thought it would be interesting to check if option expiration week historically favors the bulls and a continuation of the then current uptrend in the markets, or the bears betting on a (short-term) mean-reversion / market dip on profit-taking.

Table I below shows the S&P 500’s performance (since 1974, standardized exchange traded call options were released for trading by the Chicago Board of Options Exchange (CBOE) and the Options Clearing Corporation (OCC) in 1973) over the course of option expiration week in the event one went long on close of the last session of the week immediately preceding option expiration week (in this event on Friday, January 13, 2012) where the S&P 500 had closed at a (trailing) 3 (or more) month high at least once during the week (on the trigger day, or at least once during the preceding four sessions) immediately preceding option expiration week (like the S&P 500 did on Wednesday, January 11, 2012).

Please note: the setup had already been triggered and will go into effect on close of Friday, January 13, 2012, independently from today’s or tomorrow’s outcome.

Obviously the table is painted in red. The S&P 500 closed at a lower level (compared to the previous week’s close) two and three days into option expiration week on 3 out of every 4 (to be exact: on 31 out of 40) occurrences, and closed out option expiration week with a loss on 29 out of 40 occurrences (or almost 75% of the time).

In addition, the S&P never gained 1.0%+ over the course of the next three days since 06/08/1990 (20 years and 20 occurrences ago), and posted at least one lower close below the trigger day’s close during option expiration week on 37 out of 40 occurrences.

(click on image to enlarge)


Table I
SPX at 3 month high the week before OpEx

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Conclusion(s)

During January’s option expiration week, historical precedents favor the bears, and major market indices will probably take a breather from the recent run-up to a multi-month high before we could see a resumption of the rally.

Have a profitable week,

Frank


Disclosure: Long Market Vectors® Retail ETF (RTH) – Short SPDR® S&P 500® ETF (SPY)
(Pairs Trade)

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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). Index data (e.g. S&P 500 cash index) does not account for dividend and cash payments.

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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 Pinnacle Data Corp., and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

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Comments (2)

 

  1. William says:

    Frank
    So this and your previous post would say short the s&p until the Friday the 20th and then go long for three more weeks?

    Do you see any significant conflicts with your searches/data?

    Thanks
    Bill

    • TradingTheOdds says:

      William,

      theoretically yes.

      But this is one setup only. It may very well be that one or more (partly conflicting) signals will be triggered during the next couple of days. Best case would be a series of corresponding signals …

      Best,
      Frank

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