Very few traders can pass through the options expiration week successfully, which is really complex, and most leave behind significant trading opportunities when the market is very volatile and fluctuating.
We can consider it “opex week.” Now we try to focus this impact that the options expiration week might have on your trading plan. Let us begin sifting through the S&P 500 and several individual ETF’s performance during that particular trading week and adding our interpretation with some of the questions asked over repeatedly regarding options and expiry date.
Three back-tested trading strategies specifically designed for Opex week can help optimize traders’ approaches, capitalize on unique market movements, and perhaps enhance profitability.
What is Opex Week?
Opex week is the trading week before the third Friday of every month when US options expire. Trading is usually very hectic in this period since traders close their positions before the expiring options. This can be an area where specific market behaviors will present opportunities for trading.
S&P 500 Performance on Opex Week
We use the SPDR S&P 500 ETF Trust (SPY) as a proxy for the S&P 500 to investigate the Opex week effect. Our rules of trade are simple: we go long at the Monday open of Opex week and short at close on Opex day-Friday.
Results of the Back-Test
- Capital Growth: This strategy, during the above mentioned period has generated an outstanding capital growth of 153% while maintaining a definite rising trend without any fall.
. - CAGR (Compound Annual Growth Rate): CAGR Opex week = 3.1%. The average gain for every week is 0.3%. From this, it is noted that the investment during this Opex week is better in comparison with the remaining week.
- Time Spent Investing: This strategy requires a trader to be invested about 18% of the time, with average holding periods of less than five days per trade.
This may not spell overnight riches, but it does indicate a good possibility for traders who are willing to participate during Opex week.
Opex Week Trading Strategies
Now that we have established the Opex week effect, let’s explore three specific trading strategies that take advantage of this phenomenon.
Strategy 1: Basic Opex Week Trade
- Approach: Buy SPY at the open on the Monday of Opex week and sell at the close on Opex Friday.
- Performance: This is a no-brainer strategy that clearly indicates the existence of Opex week effect wherein you can take advantage of the price patterns reliably during the expiration time.
Strategy 2: Defensive ETF Concentration
For our second strategy, we will only look at two defensive ETFs, namely XLV or Healthcare and XLU, which are utilities. These strategies are available only for our paid members and subscribers.
- **Trading Rules :
Buy on Monday at the start of Opex week, Exit at the close of the same day Opex
*Performance Results*
This strategy does offer an annual return that comes to about 4.5%. This in return is relatively high by looking at the fact that time invested is less than 10%. - The average profit per trade is about 0.72%, and this provides quite a comfortable cushion against slippage and commissions, especially in these very liquid instruments.
Strategy 3: Shorting on Opex Day
This strategy will be appropriate for the aggressive trader and it is also a day trade on the Opex day.
- Strategy: Short SPY at the opening of the Opex day and then cover at close.
- Performance: As the strategy progresses throughout the history, it reveals that Opex day has always been a weak day for bulls as the short position of this strategy was on average 0.16%.
Improving Strategy Performance
Each and every strategy has its positive points and can be developed further to maximize profit levels. For instance, a decision and timing may become better with the addition of more variables or indicators such that an entry point would be better than an existing one along with the respective exit point.
FAQs
What If I Have Called an Option?
Options can be either in the money (ITM) or out of the money (OTM).
- OTM Case: The option expires as worthless. Thus, the holder loses his upfront investment and the seller enjoys the premium.
- ITM Case: It is either exercised by the holder to buy the shares of the underlying or he sells the option in the market.
What Is Pin Risk?
Pin risk is the risk from the uncertainty of when the options will be exercised given that the price of the underlying security is almost the same as the strike price at expiration. It, therefore, results in extreme trading activity and volatility on the expiration day.
What is Quadruple Witching Day?
It is known as quadruple witching, occurring when the expiration of options and futures contracts coincides. These happen four times in the year: March, June, September, and December. Opex Day has earned a bad name from very high volatility and activity; hence, there is room for smart traders.
Is Opex Day Volatile?
Yes, the Opex day is typically more volatile than an average trading day. Statistics reveal that the quadruple witching days are the most volatile, followed by Opex days, and the random days are the least volatile.
Can Options Be Exercised After Hours?
Generally speaking, options cannot be exercised after regular hours of trading in the United States. However, some brokers do allow this option, but after-hour trading is restricted.
Do Options Expire at Open or Close?
In the United States options expire at the close on expiration day, not opening. However, over-the-counter options may follow other expulsion practices.
Conclusion
Opex week effect is an extraordinary trading platform supported, in the long run, with historical data and tested strategies. Getting knowledge about expiration policies for options and correct trading schemes will make trading opportunities much more promising towards profits.
This information makes maneuvering during Opex week much easier. This simple SPY strategy, the defensive ETFs, or taking advantage of day trading on Opex day-all are viable options that form a very solid foundation from which you can capitalize on market dynamics during this crucial period. Happy trading!