Option Expiration Week

[willd 10]

Option Week Effect on the SPX

 

 

 

 

Have you ever found yourself caught in a contra trend day trade that didn’t work regardless of the logic? Be honest. It has happened to me, but I am getting better as to when I take them. About six months ago, I read an article by a seasoned professional trader who mentioned he would not take contrarian trades during option expiration week. So I decided to figure out what effect expiration week had on the SPX.

 

I went back to the beginning of 1990 and divided the weekly data for the SPX into two groups – EXPIRATION and OTHER. My initial review found prices ranged from 3 to 187 points. The 187.79 point move happened the week of April 14, 2000. This was one month after the 2000 bull market top and it was not an option expiration week. The following table shows the SPX weekly price range for both groups from January 1990 through December 2006. As an example, the week ending December 15, 2006, the SPX range was 26.88 points. A 26 + point range has occurred 88 weeks since 1990 and happens less than 42.6% of the time (100% - 57.4%).

 

 

Expiration week only occurs once a month, therefore, I used the weekly averages to compare these two groups. In the first chart, SPX Average Range by Year, both group’s ranges significantly increased starting in 1997. For 2000, 2001 and 2002 (Bear Market decline), EXPIRATION week averages exceeded OTHER weeks. This occurred again in 2005 and 2006.

From the above chart, I decide to further divide the two groups. Table 2 lists the statistical data of the two groups from 1990 to 1999 and 2000 to 2006. The EXPIRATION’s mean exceeds OTHER by 2.14 points or 5.7% since 2000. There was an edge less than .09% from 1990 to 1999.

 

 

Using only the data since 2000, the following chart illustrates which months of the year you may expect to find a trading edge during EXPIRATION week. There are seven months, March, April, May, September, October, November and December when EXPIRATION’s range exceeded OTHER.

 

What I have gathered from this study is that EXPIRATION week range tends to be pushed a little further than other trading weeks. From my personal observations, once a trend has been established for the afternoon session, never trade against it during EXPIRATION week. For another time, I have done an additional study that breaks the Expiration week data down by day of the week. Can you guess which days of the week have the edge?