OPEX, or options expiration, is the day on which stock options contracts expire. Stock options give the holder the right, but not the obligation, to buy or sell a certain number of shares of a stock at a certain price by a certain date. If an option is not exercised by the expiration date, it becomes worthless. You might wonder: What has happened the day AFTER OPEX day – options expiration day?
If you want to dig deeper, please read our article, OPEX week anomaly and effect.
OPEX day typically falls on the third Friday of each month in the United States. On OPEX day, options contracts have a lot of trading activity as traders close out their positions or exercise their options. This can lead to increased volatility in the stock market, especially in the stocks that have the most options contracts expiring.
There are a few reasons why OPEX day matters for stocks:
- Increased volatility: As mentioned above, OPEX day can lead to increased volatility in the stock market. This is because traders are closing out their positions or exercising their options, which can lead to a lot of buying and selling activity. It’s no myth, volatility of the OPEX and quadruple witching days is higher.
- Pin risk: Pin risk is the risk that a stock price will close at its strike price on OPEX day. This can happen when there are a large number of options contracts expiring at the same strike price. Pin risk can lead to increased volatility and make it difficult for traders to execute their orders. You can read more about OPEX day pin risk here.
- Gamma squeeze: A gamma squeeze is a situation in which market makers are forced to buy or sell a stock to hedge their exposure to options contracts. This can happen when there is a lot of buying or selling activity in options contracts. Gamma squeezes can lead to sharp movements in stock prices.
Overall, OPEX day is an important event for the stock market. It can lead to increased volatility, pin risk, and gamma squeezes.
What Has Happened 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 zero, significantly lower than any random day (0.04%).
What about bonds (TLT)?
The average gain is a negative 0.03% (any random day is +0.02%).
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