Revisiting the Day-After Options Expiration
It’s been a while since I’ve talked about the day-after options expiration, but this particular oddity might be a changin’.
When is options expiration day?
Equity and index options expire after the close of trading on the third Friday of every month. When the third Friday is a holiday, they expire on Thursday. The “day-after options expiration” then is usually the following Monday.
My previous posts here and here on the topic could be summed up as: the day-after options expiration (Monday) has historically been very bearish when expiration day (Friday) was down, but neutral when expiration day was up. To illustrate…
The graph above shows the results of three “strategies” trading the S&P 500 index from 1970.
The first (blue) made twelve one-day trades per year, from the close of each expiration day (Friday) until the close of the day-after (Monday). This is our benchmark day-after options expiration day. The second strategy (green) only took that position when expiration day was up, and the third (red), only when expiration day was down.
Geek note: this is a proof of concept so these results are frictionless (i.e. do not account for transaction costs and slippage) and ignore return on cash.
Clearly, from 1970, the day-after options expiration has been very bearish when the market fell on expiration day (red), but only neutral when it rose (green).
But notice what has happened more recently towards the right hand of the graph above – the difference between the red and green lines has all but disappeared. The next graph shows the same results as the first from 2000…
In more recent history, there’s been little difference in day-after options expiration returns based on expiration day – they’ve both been about equally bad.
In fact, in the last year or so, the observation has actually reversed with positive expiration days leading to the most bearish returns (but I think that that’s too few observations to take seriously…yet).
For most of the market’s history, negative monthly expiration day returns beget negative returns the following day, and positive expiration days beget neutral returns. But more recently, that difference has disappeared and both are now about equally bearish.
Three random closing thoughts: (1) Perhaps this is related to the evolution in daily follow-through (read more here and here) which seems to have occurred at roughly the same time? (2) This could very well just be a fluke in the data – note other periods (ex. mid-80’s) where positive and negative expiration days were also about even. And (3) this is another example of why adaptive approaches to trading are so important…the State of the Market report (which includes the day-after options expiration) caught on to this change and adjusted its predictions long before I snapped to it.
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