The week after options expiration week is after the third Saturday each month. The week before, the options expiration week, is normally a positive week for stocks. 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?
Our backtests reveal that the week after options expiration week is lower than a random week, although the results vary from month to month. August has been a good month while September has performed poorly.
How to backtest the options expiration week
In order to test the options expiration week, we need to make a script or code to count the number of Fridays. In a previous article we touched upon how to do it and we recommend reading that article:
(For your convenience you can buy the Amibroker code for the options expiration week on this link:
Additionally, you get access to the Amibroker code (some even for Tradestation/Easy Language) for all the other free trading strategies we have published since 2012.)
How do stocks perform the week after the options expiration week?
Let’s test the following trading strategy:
- Today is Friday in any options expiration week.
- We buy the S&P 500 at the close.
- We sell at the close the 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 September 2021 (while only being invested during the week after options expiration week), we get this equity curve:
The CAGR is 1.16% while the time spent in the market is about 22%. Thus, the week after options expiration day is lower than an average 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 0.7%.
Please keep in mind that the week after options expiration in November is Thanksgiving week, and this might explain the positive performance that month. 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
This 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 0.8%! 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 at the same time: stock index futures, stock index options, single stock options, and single stock futures. Our take on the quadruple witching day contains plenty of backtesting and facts.
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The week after the options expiration week is not a strong week for stocks, and in certain months very negative. This is probably not a trading strategy in itself, but the stock market is just as much about avoiding the bad trades, just like long-term investing is about the stocks you don’t own.