OPEX day in the stock market is the day on which most stock options expire. It typically occurs on the third Friday of each month, but it can be moved if that day is a holiday. As traders, it might be interesting to ask this: What has happened the day before options expiration day – OPEX?
We have previously covered the OPEX week anomaly and effect.
Let’s briefly explain what the OPEX day is:
On OPEX day, options traders must either exercise their options or let them expire unexercised, making them liable to “pin risk”. If they exercise their options, they will buy or sell the underlying stock at the strike price. If they let their options expire unexercised, they will lose the premium they paid for the options.
OPEX day can be a volatile day in the stock market, as options traders unwind their positions. Market makers and other large traders may also take positions in the underlying stock in order to hedge their exposure to options.
Here are some of the reasons why OPEX day can be volatile:
- Options expiration: When options expire, they are settled by either exercising the option or letting it expire unexercised. This can lead to increased trading volume in the underlying stock, as options traders unwind their positions.
- Hedging: Market makers and other large traders may take positions in the underlying stock in order to hedge their exposure to options. This can also lead to increased trading volume and volatility.
- Rebalancing: Some investors may rebalance their portfolios on OPEX day, in order to maintain their desired asset allocation. This can also lead to changes in demand for the underlying stock, which can affect prices.
We have covered the volatility of the OPEX and quadruple witching days.
It is important to note that OPEX day volatility is not always predictable. Some OPEX days are relatively calm, while others can be quite volatile. It is important to do your own research and understand the risks involved before trading on OPEX day!
What Has Happened The Day Before OPEX (Options Expiration Day)
Let’s backtest. 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 is the equity curve:
The average gain is 0.02%, which is below the 0.04% gain for any random day. Thus, 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%).
If you want the code for OPEX day, you might want to consider becoming a Silver member and get access to lots of code and strategies.