The Options Expiration Week Effect | OPEX Seasonality

The options expiration happens on the Friday before the 3rd Saturday of each month in the US. An often referred to effect is the options expiration week effect. Is this effect real, or is it just a myth? In this article, we test the option expiration week effect.

S&P 500 shows above-average returns during the options expiration week. Only July and January show negative returns during the options expiration week, while April is the best month. Overall, there seems to be an options expiration week effect.

Below we discuss every aspect of the options expiration week and how stocks perform during that particular week. Also, please remember that the week is often referred to as OPEX week.

Options expiration week trading strategies

Before you go on to read about the options expiration week, we would like to remind you that we have two trading strategies that specifically trade only during this week.

The first strategy is in S&P 500 (SPY/@ES) and is an overnight trading strategy that takes a position and holds for about 24 hours:

The second trading strategy is a swing trade in the ETFs with ticker code XLU (utilities) or XLV (healthcare). It’s a trade that holds for a few days, given a condition: Long swing trade XLV/XLU

Recommended reading: 33 Best Option Trading Strategies

When do options expire? What is the option expiration week?

When is OPEX? The options market is fragmented. There are options on futures, equity, or whatever asset there is. However, in this article, we only look at US stocks and equities.

US-listed stock options expire on the third Friday of every month (to be precise: on the Friday before the 3rd Saturday of each month). The only exception is when Friday is a public holiday (it could be Good Friday or Independence Day). On these rare days, the expiry is on Thursday – the day before Friday.

This happens when the options on stocks, stock index futures, and stock index options expire on the same day. This happens four times yearly: in March, June, September, and December.

Fundamental reasons behind the option-expiration week effect

The main reason for the option expiration week effect refers to a noticeable decrease in option open interest as the expiration date nears, leading to a reduction in both call and put options. Specifically, during these weeks, there’s a significant drop in open interest as the near-term options approach expiration and subsequently expire. This reduction in call-open interest typically corresponds to a decrease in the overall net long call position held by market makers in the market.

OPEX stock

What is OPEX in stocks? There are thousands of listed stocks in the US, and thus the OPEX week is important, despite many just having minuscule options trading. After all, the OPEX week stock is about stocks AND options. During OPEX week, OPEX Friday, the end of the week, is the most important day because of imbalances, often labeled “pin risk” (see separate section).

Options expiration day creates imbalances

For those of us who day trade stocks and focuses on imbalances, the option expiration days (OPEX) are often lucrative. Both the open and the close have imbalances that can be preyed on.

The hypothesis is that “pin risk” causes a significant increase in trading activity, but more importantly, more imbalances and “abnormal” action (see more below).

What happens when an option expires?

To understand option expiration, we need to start by describing what options are.

A stock has theoretically an infinite life – at least until the company is bankrupt, merged, or bought by another company.

Opposite, options have a finite life: they expire and “cease working”. How is that possible?

For example, Microsoft might have call options with a strike of 120 with an expiry date of the 20th of October. The date today is the 1st of July, and the price of Microsoft shares is trading at 110.

A call option means the owner has the right to purchase shares in Microsoft for 120 either before the expiry date of the 20th of October or on the expiry date (depending on the option type).

Thus, the time limit is set to the 20th of October. After that date, the option expires and ceases to exist. If the price of Microsoft is less than 120 at the expiry date, it doesn’t make sense to buy at 120. This means the option expires worthless. If the price is higher, the owner will exercise the option and buy at 120.

This means the price of the options varies significantly from how a share price is valued. The value of an option might be more influenced by the time to expiration and/or the volatility, and thus the movement can be substantially different from the underlying stock. However, it’s not the purpose of this article to go into detail about options pricing.

How options expiration affects stock prices (OPEX stock price)

The closer we get to options expiration (OPEX), the bigger the risk for delivery for the issuer.

Because of this, trading activity in options can have a direct and measurable effect on stock prices, especially on the last trading day before expiration.

Let’s briefly look at how “pin” risk can influence the overall market as well as specific equities:

Pin risk at options expirations

Pin risk involves having to take delivery of the shares if you have issued options. For example, if you have issued puts with a strike at 50, you are obligated to buy those shares if the share price is lower at expiration.

Many traders and investors don’t want to have the risk of being the owner of those shares over the weekend in case they get exercised. To offset this, they might sell the underlying shares. This way, the price of the shares goes up and down closer to expiry as traders take hedges.

Anyway, pin risk is a vast topic, but we hope you get a vague idea of the problems facing traders because of this risk and why the price might be more volatile on the expiration day.

The options expiration week effect trading strategy (OPEX week)

Based on the assumed positive effect options expiration has on stock returns, we can backtest a simple trading strategy that buys on the open of the options expiration week and exits on the close of the options expiration day (usually a Friday). We own stocks this week and stay in cash the rest of the time.

If Monday is a holiday, we enter on Tuesday. Likewise, if Friday is a holiday, we exit on Thursday.

We must mention that the results vary depending on when and how we enter. For example, if we enter on Monday at the open or the prior Friday at the close, give a different ranking of the best month. As always, traders need to do their own research if they want to use this effect/anomaly with real money.

Because most of the open interest in options is in large-cap stocks, we test the effect on the S&P 500. We tested with both S&P 100 and S&P 500 but found only minimal differences. We use the ETF with the ticker code SPY when we backtest (since inception).

We want to emphasize that the options expiration week effect seems to work only from 1990 and later. Before 1990, we fail to see much effect. We can argue this is to be expected as it was only in the 1980s that derivatives took off as trading vehicles.

The backtester code for trading the options expiration week effect

The effect is not the easiest to backtest – it’s a bit cumbersome to get the correct code.

However, if we plot the remaining days as a graph it looks like this in Amibroker:

The bottom pane shows the number of days to the third Friday of the week.

If you would like to have the Amibroker code for the options expiration week plus all the code for all the other free trading strategies we have published since 2012, please click on this link:

The results of the options expiration week effect (SPY OPEX week)

The equity chart below shows the compounding returns of being only invested in the S&P 500 during the options expiration week (from the open of the week to the close of the week – 100 000 compounded):

The CAGR is 2.8%, and the average gain is 0.28% per week, higher than any other random week. Keep in mind that you are invested only around 18% of the time, and the average number of bars in a trade is slightly less than 5. As you can see, the effect has been week over the last three years.

For QQQ (Nasdaq), the number is 0.32% per trade.

If we enter at the close of the last trading day before the options expiration week, usually a Friday, the average gain increases to 0.35% per trade for the S&P 500. For QQQ and Nasdaq, it goes a little down because of poor performance in 2000/01.

Thus, we can conclude that there is an options expiration week effect.

Options expiration week effect per month

Does the result differ per month?

Yes, the result differs substantially per month. However, keep in mind that we only test from 1993 until May 2021 and only have 28 or 29 observations per month. Hence, “outliers” can distort the monthly results.

The result per month is as follows (100 000 compounded – see the last column for the average gain in %):

The first column indicates the month: number 4 tells us that April is the best month by far, and that July and January are the worst.

The equity curve (compounded results) for April looks like this:

Options expiration week strategy S&P 500

We frequently trade seasonal trading strategies and the options expiration week effect is a perfect example of such a strategy. Nevertheless, we believe you need to add one more parameter to make it worthwhile for trading.

One example of an improved options expiration week effect strategy is our monthly trading edge for May 2022 for S&P 500. It’s an overnight strategy – from one day to the other.  The equity curve looks like this:

If you are not a subscriber, you can purchase single strategies or bundles.

Quadruple witching day

Four times per year, all financial contracts expire on the same day during options expiration day (stock index futures, stock index options, single stock options, and single stock futures). This happens in March, June, September, and December. These four days are called quadruple witching days and are always looked upon with great anticipation, especially by the media.

We have covered this day in a separate article that is called quadruple witching day, and it contains plenty of backtests and facts.

OPEX day performance

The OPEX day is well known, but very little research can be found online about the specific options expiration day. The options expiration day is one of the most active days in the stock market each month. It is when the majority of stock options expire or get exercised. But how do stocks perform on this particular day? How do stocks perform on options expiration (OPEX) day?

As mentioned, US-listed stock options usually expire on the third Friday of each month, precisely on the Friday before the third Saturday. However, exceptions occur when Friday coincides with a public holiday, like Good Friday or Independence Day. On such rare instances, the expiration date is shifted to Thursday, the day right before Friday.

Furthermore, these days often exhibit high volatility due to increased trading volumes in both options and the underlying stock. This heightened activity can impact stock prices, resulting in larger price fluctuations. Some professional traders employ arbitrage strategies, capitalizing on price disparities between options and the underlying stock. Additionally, market makers and institutions that write or sell options may need to adjust their positions as a hedge against potential exercises.

Overall, the option expiration day is one of the most active days of trading in the month. As such, we decided to backtest its performance and see how stocks do on this particular day of the month.

How Do Stocks Perform On Options Expiration Day? Backtest

The strategy is very simple: we only hold the asset on the option expiration date – from the close of the day before to the close of the OPEX day.

We backtested the strategy using the ETF version of the S&P 500, SPY. The data is adjusted for dividends and splits. Here is the equity curve:

The returns are awful. There were 361 option expiration dates since 1993 (only Fridays, we are not counting holidays).

Here are some stats and metrics about the strategy:

• The compounded returns are -23.55%
• The win rate is 51.4%
• The average win is 0.60%, and the average loss is 0.77%

Is it good enough to be a short strategy? Perhaps, it depends on your preferences. That said, by using a filter, you can improve it (we did, but that is something for a later article).

The strategy is not profitable, and it does not have a good win rate or an average win. Although improving it is very difficult, we have considered adding a simple moving average filter:

On the day before the expiration date, we check whether the SPY close is above its 50-day moving average. If it is, we buy at the closing price and sell at the closing price the following day. If it is not, we take no action. Here are the results:

As you can see, the returns are still negative. Although the strategy has fewer trades (249), the win rate increases slightly to 53.01%, with an average win of 0.47% and an average loss of -0.61%.

Let’s summarize the returns on the OPEX day: We backtested two trading strategies, one with a filter and the other without, and found that, in both cases, the options expiration date had negative returns on average. However, this doesn’t mean that you should avoid trading on this day, but manage your risk more tightly, or perhaps go short.

International options expiration week

The US is not the only place where you have options expiration week, but it’s the only place where we have found reasonably good trading strategies based on this seasonal effect. We did a backtest of the main futures contracts in the EU, but we were not able to find any consistent edge as we can in the US.

We summarized our findings in five different articles:

• Trading the futures expiration week in DAX 40 and Euro Stoxx 50
• Trading the futures expiration week in Euro Bonds (FGBL)

What happens after the options expiration week?

When you have read so far, you might wonder what happens the week after options expiration. How does the stock market perform during the week after options expiration week? Is it possible to develop trading strategies the week after options expiration week?

While we see a positive options expiration week effect, the effect fails to continue into the following week. The average gain for the week after options expiration is lower than any random week, but the results vary monthly. Three months are particularly negative: February, June, and September. The latter is the worst – by far.

Let’s backtest to look at the specifics of the week and days after the options expiration week. How do stocks perform the week after the options expiration week?

Let’s test the following trading strategy:

1. Today is Friday in any options expiration week.
2. We buy the S&P 500 at the close.
3. We sell at the close of next Friday. Thus, we own the S&P 500 for one week (five trading days).

If we invested 100,000 in 1993 and let this amount compound until today (while only being invested during the week after options expiration week), we get this equity curve:

The CAGR is 1.5%, while the time spent in the market is about 22%. Thus, the week after the options expiration day is lower than an average week.

Post options expiration week – does it matter which month it is?

Yes, the month matters. This is the total profits of being invested in the different months:

The first column shows the month. August is the best month, while September is the worst.

This is the equity curve of only being invested in the week after options expiration week in August:

The average weekly gain is 0.55%.

Please remember that the week after options expire in November is Thanksgiving week, which might explain that month’s positive performance. Stocks have shown historically strong performance around holidays. Please see our two other articles about the holiday effect and Thanksgiving and Black Friday effect.

The week after options expiration – September

The performance in August is in stark contrast to the week after options expiration week in September:

The average loss for the week after the options expiration week in September is 0.94%! Furthermore, the win ratio is a low 25%.

September is one of the four months where the options expiration week is called quadruple witching day. The other options are March, June, and December. All four financial contracts expire simultaneously: stock index futures, stock index options, single stock options, and single stock futures. Our take on the quadruple witching day contains many backtesting, statistics, and facts.

What Normally Happens The Day Before Options Expiration Days?

What normally happens the day before options expiration days is that S&P 500 has poor returns.

Let’s find out by backtesting. We make the following trading rules:

• We go long S&P 500 (SPY) at the close of Wednesday in the OPEX week.
• We sell at the close of the day before OPEX day (normally a Thursday)

This what the equity curve looks like:

The average gain is 0.03%, which is below the 0.04% gain for any random day. Thus, it is not a particularly good day for bulls!

Opposite, bonds are doing much better (TLT):

The average gain is 0.06%, which is much better than any random day (0.02%).

What Has Happened The Day After OPEX Day (Options Expiration)?

Historically, S&P 500 has performed poorly the day after OPEX day.

Let’s backtest and make the following trading rules:

• We go long S&P 500 (SPY) at the close of OPEX day.
• We sell at the close of the day after OPEX day (normally a Monday)

The equity curve for SPY is not very appealing:

The average gain is negative: -0.02%. Also, for bonds, the returns are negative.

What has happened from the day before OPEC day to the open of the OPEX day?

We find out ba backtesting:

• Buy the close of the day before OPEX day; and
• Sell at the open of the OPEX day.

The equity curve looks like this:

The average gain per trade is 0.09%, significantly better than any random day.

The options expiration week – conclusion

Our backtest confirms that there is an options expiration week effect. However, in our opinion, it’s not tradeable on its own and needs one or more parameters. But if you have read so far, you might get some ideas by looking in our shop.

Options expiration week FAQ

Let’s answer some common questions about the OPEX week not answered earlier in the article:

What happens when a call option expires?

An option is either in-the-money or out-of-the-money. If it’s out-of-the-money, it expires worthless, and the owner loses what he paid for them. The seller can keep the premium.

If the stock price is higher than the strike price before the call option expires, he can exercise the option and buy the underlying shares or sell the calls in the market.

Can options be exercised after hours?

No. You can’t exercise outside official trading hours.

That said, it can be done if your broker allows it. But be careful because trading is thin outside official trading hours and you might get screwed on the bid and ask price.

Do options expire at open or close?

In the US, it’s done at the close, not at the open, at the expiration day. However, OTC options might have different expiration times.

OPEX – Options expiration dates (Expiration Calendar)

For your convenience, we have a calendar for the OPEX week the following years and options expiration dates (Source: CBOE):

OPEX calendar 2024

Monthly option expirations

19 January 2024
16 February 2024
15 March 2024
19 April 2024
17 May 2024
21 June 2024
19 July 2024
16 August 2024
20 September 2024
18 October 2024
15 November 2024
20 December 2024

There are no irregular monthly expirations in 2024 (all are Fridays).

These are Irregular weekly expirations in 2024 (normally Friday):

28 March 2024 (Thursday, due to Good Friday holiday on 29 March 2024)

Source: CBOE, www.cboe.com/about/hours/us-options/

OPEX calendar 2025

Monthly option expirations

17 January 2025
21 February 2025
21 March 2025
17 April 2025 (Thursday, due to Good Friday holiday on 18 April 2025)
16 May 2025
20 June 2025
18 July 2025
15 August 2025
19 September 2025
17 October 2025
21 November 2025
19 December 2025

These are Irregular weekly expirations in 2025 (normally a Friday):

3 July 2025 (Thursday, due to 4 July holiday on Friday)

Source: OCC, www.optionseducation.org/referencelibrary/expiration-calendar

OPEX calendar 2026

Monthly option expirations

16 January 2026
20 February 2026
20 March 2026
17 April 2026
15 May 2026
18 June 2026 (Thursday, due to the June-teenth holiday on 19 June 2026)
17 July 2026
21 August 2026
18 September 2026
16 October 2026
20 November 2026
18 December 2026

There are Irregular weekly expirations in 2026 (normally a Friday):

2 April 2026 (Thursday, due to Good Friday holiday on 3 April 2026)
24 December 2026 (Thursday, due to Christmas Day on Friday)
31 December 2026 (Thursday, due to New Year’s Day on Friday)

Possibly also 2 July 2026 (Thursday) if Friday 3 July 2026 is an exchange holiday.

FAQ:

What are Calendar-Based Trading Strategies?

Calendar-based trading strategies involve making investment decisions based on specific dates or periods within the calendar year to exploit recurring patterns, events, or seasonal trends in financial markets. Examples include trading around earnings reports, seasonal patterns, tax-related events, economic data releases, and holiday effects.

What do backtests reveal about the performance of the stock market during the week after options expiration week?

Backtests indicate that, on average, the week after options expiration week tends to be lower than a random week. However, results vary from month to month. August has historically shown positive performance, while September has performed poorly.

How can one backtest the options expiration week and its effects on the stock market?

Backtesting involves creating a script or code to count the number of Fridays in the options expiration week. The article suggests referring to a previous article for guidance and provides Amibroker code for testing.

What is the trading strategy tested in the article for the week after options expiration day?

The backtested strategy involves buying the S&P 500 at the close on a Friday during any options expiration week and selling it at the close the next Friday. This means holding the S&P 500 for one week (five trading days).