Daily Commentary - Posted on Thursday, January 12, 2012, 5:29 PM GMT +1
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)
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,
Disclosure: Long Market Vectors® Retail ETF (RTH) – Short SPDR® S&P 500® ETF (SPY)
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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