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Expiration Week Ups and Downs

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When futures expire, what will the market do?

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This is expiration week, when options on index and equity futures expire. These weeks have an almost mystical quality for some traders, and many have spent a good deal of time and money trying to figure out an edge to game them.

That's probably because if a consistent edge can be found, then fortune would be sure to follow - many options move several hundred percent in the span of a few days as they approach expiration, effectively becoming lottery tickets. Find an edge to game these weeks effectively, and one could be sipping margaritas by the beach for a living.

Due to that alluring prospect, many fanciful theories have been introduced that take expiration into account. One of the more popular ones is that the Thursday prior to expiration week is a "misdirection" day for the following week (it isn't really). Another is that expiration weeks tend to see more than their fair share of big down days.

Let's take a look at that last idea.

The table below shows the probability that each day of the week showed a return that was less than -1%. In the table, probabilities are shown for days during option expiration weeks, alongside those of random non-expiration weeks, for the time periods from 1995-present and also from just the past three years. The cells highlighted in red were the worst offenders.

Since 1995

Since 2005

Day

Exp Week

Random

Exp Week

Random

Monday

9%

12%

6%

3%

Tuesday

11%

15%

17%

11%

Wednesday

14%

14%

6%

6%

Thursday

15%

17%

8%

11%

Friday

18%

14%

11%

10%

Any Day

46%

48%

39%

28%


We can see from the table that during expiration weeks since 1995, Fridays were the worst days, with 18% of them showing a loss of more than 1%. During random non-expiry weeks, Thursdays were the worst days. The greatest variation between expiration weeks and non-expiration weeks occurred on Fridays, with those days being more likely to have a big negative return.

Overall, expiration weeks had a 46% probability of seeing a 1% down day sometime during the week, compared to a 48% chance during non-expiration weeks, so there was actually less chance of seeing a big down day during one of these weeks.

Since 2005, these tendencies have changed a bit, with Tuesday now having the greatest chance of seeing a big down move, and also the largest deviation from random. Overall, the probability of seeing a big down day any time during the week was greater during expiration weeks than non-expiration weeks, but it was less of a tendency than we saw since 1995.

It's only fair to look at the other side of the coin and look for big up days, which is what the following table shows. The green highlights show the days that are most likely to see a 1% or more gain.

Since 1995

Since 2005

Day

Exp Week

Random

Exp Week

Random

Monday

20%

14%

8%

8%

Tuesday

17%

15%

11%

7%

Wednesday

12%

16%

8%

11%

Thursday

13%

13%

3%

6%

Friday

13%

17%

6%

10%

Any Day

55%

52%

36%

32%


This table shows that Mondays were the best days since 1995, with a 20% probability of seeing a +1% up day during expirations. Since 2005, that positive vibe has switched to Tuesdays, with an 11% probability.

Overall, there was a 55% probability of seeing at least one day with a 1% or greater rise during expiration weeks, compared to 52% during random non-expiration weeks. Since 2005, those probabilities have decreased, but they were still greater during expiration weeks.

What's the overall take-away from this? Well, we tended to see an increase in volatility during expiration weeks, particularly during the past three years. We were more likely to see a 1% down day or a 1% up day during expirations than we were when expiration wasn't looming.

According to recent history, if we're going to see a big down day during expiration, then it's most likely going to occur on Tuesday, though it's not overwhelming. But Tuesday is also the most likely candidate to see a 1% up day.

In general, I see absolutely no evidence to support the idea that expiration weeks tend to see at least one big down day, any more than they're likely to show a big up day.
No positions in stocks mentioned.

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