Expiration week plays

[akivak]

I found the following interesting article:
http://www.cxoadvisory.com/calendar-effects/option-expiration-week-stock-return-drill-down/

Summary: The average weekly return of 28 large-cap stocks with actively traded options during option expiration week (other weeks) is 0.45% (0.12%) over the period 1996-2008.

I know that there are some advisory services that use this statistics to their advantage: they buy calls on some indexes or widely traded stocks on Friday before the expiration week and hold them 1-3 days.

What do you think? Can this strategy work? It seems that statistically it has better probability of success than just buying options at random times.

 

[livevol_ophir]

Quote from akivak:


What do you think? Can this strategy work? It seems that statistically it has better probability of success than just buying options at random times.

Options Expo has a tendency to be much more volatile. That means the std deviation is higher. If you take that into account, and apply it to the average returns, my bet is that the difference in returns is not statisticallysignificant. In other words, there is no trade. You get higher expected returns with higher expected risk.

Net, net, same risk adjusted returns.

 

[tradingjournals]

Quote from livevol_ophir:

Options Expo has a tendency to be much more volatile. That means the std deviation is higher. .

A statement with no numbers and no experience is an imagination.

Option expiration day has a tendency to be flat on the vast majority of the days I have seen it. The standard deviation can be a source for easy money on expiration day as the market oscillates around a strike.

Last friday was an example.

 

[akivak]

Quote from tradingjournals:

A statement with no numbers and no experience is an imagination.

Option expiration day has a tendency to be flat on the vast majority of the days I have seen it. The standard deviation can be a source for easy money on expiration day as the market oscillates around a strike.

Last friday was an example.

I was actually talking about expiration week, not day.
Sometimes it is more volatile, but I’m not sure this is correct in general. In order to compensate for 4 times larger returns during expiration week, IV should be REALLY high.

 

[nazzdack]

Quote from akivak:
----The average weekly return of 28 large-cap stocks with actively traded options during option expiration week (other weeks) is 0.45% (0.12%) over the period 1996-2008.
----their advantage......
----What do you think? Can this strategy work? It seems that statistically it has better probability of success than just buying options at random times.

1) That "number", 0.45%, seems "high".
2) The biggest potential advantage can be taking advantage of time decay with options. It remains to be seen if you can be consistently profitable.
3) It may be "safer" to trade index options instead of stocks or stock options.

 

[livevol_ophir]

Quote from akivak:

I was actually talking about expiration week, not day.
Sometimes it is more volatile, but I’m not sure this is correct in general. In order to compensate for 4 times larger returns during expiration week, IV should be REALLY high.

Just looking for a 0.3% difference to be not statistically different than zero.

Anyway, I'm just throwing it out there; something to think about.

 

[akivak]

Quote from nazzdack:

1) That "number", 0.45%, seems "high".
2) The biggest potential advantage can be taking advantage of time decay with options. It remains to be seen if you can be consistently profitable.
3) It may be "safer" to trade index options instead of stocks or stock options.

Same strategy can be applied to index options. The principle is to buy calls on Friday before expiration and hold 1-3 days, to take advantage on statistical bullishness of the expiration week.

 

[tradingjournals]

Quote from akivak:

... In order to compensate for 4 times larger returns during expiration week, IV should be REALLY high.

How sure are you? and why?

Is not that positive return in overall market means LOWER IV, NOT higher IV?

 

[akivak]

Quote from tradingjournals:

How sure are you? and why?

Is not that positive return in overall market means LOWER IV, NOT higher IV?

I was referring to the statement:

“Options Expo has a tendency to be much more volatile. That means the std deviation is higher. If you take that into account, and apply it to the average returns, my bet is that the difference in returns is not statisticallysignificant. You get higher expected returns with higher expected risk.”

My point is that higher risk is caused by higher IV. When average return is 4 times higher, if the IV is only slightly higher, your risk/reward is still much better. Only if the IV is significantly higher, your expected higher return is being offset by higher IV. My feeling is that the difference in IV between expiration week and other weeks is not that big, so you still have a statistical advantage.

 

[darwin666]

BTW.. now every week is expiration week.. there are WEEKLYs available on SPY QQQQ DIA.. IWM to keep us gambling all the time..


http://www.fxstreet.com/education/related-markets/lessons-from-the-pros-options/2010-06-15.html


On that fateful morning of June 4, weekly options were listed on all four major index tracking ETFs (Exchange Traded Funds). These four ETFs are the DIA (SPDR Dow Jones Industrial Average), the SPY (SPDR S&P 500), the QQQQ (PowerShares Exchange-Traded Fund), and the IWM (iShares Trust Russell 2000 Index). Although I was excited about their creation, I am certain that these new listings might have confused some traders. On the platform's option chain on that day there were three kinds of June options listed. The first ones, with the least amount of days to expiry, were the weeklies. The second ones were the regular options that expire on the third Saturday; and the last ones were the June Quarterly options that stop trading on the last day of June, which is June 30, 2010. Figure 2 below was taken on Monday, June 7, 2010, before the opening bell. At that point, the listing on the weekly options did not say 5 days left because the platform by default had already counted Monday as gone.