Trading Around Option Expiration Days
Posted in Calendar Effects, Equity Options
June 24, 2009
Does recent (post-1980s) data suggest any stock market return anomalies around the equity option expiration (OE) date (third Friday of each month)? To investigate, we examine close-to-close returns from five trading days before to five trading days after OE. Using daily closing prices for the S&P 500 index for January 1990 through June 2009 (233 OEs), we find that:
The following chart shows the raw average daily S&P 500 index returns from five trading days before (OE-5) through five trading days after (OE+5) all OEs since 1990 and since 2000. The mean daily return for all trading days since 1990 (2000) is 0.03% (-0.01%). Results suggest a modest positive bias for a few days before and a negative bias just after OE. However, the standard deviations of daily returns are in the range 1.0% to 1.7% across the 11-day OE-centered interval for both sample periods, so variability tends to swamp average returns.
To isolate potential OE effects from overall stock market drift, we detrend the results by subtracting the average return for the samples from the raw daily averages within the OE-centered intervals.
The next chart summarizes the detrended daily S&P 500 index returns from five trading days before through five trading days after the OEs since 1990 and since 2000. Detrending does not affect conclusions. Again, the standard deviations of daily returns indicate that variability tends to swamp average returns.
As a robustness test, we calculate detrended average daily returns around OE for four non-overlapping subperiods since 1990.
The next chart summarizes the detrended average daily S&P 500 index returns from five trading days before through five trading days after the OEs during four consecutive five-year subperiods since the beginning of 1990 (with the last subperiod only about four and half years). While there are some inconsistencies in average returns across subperiods, results offer some support for belief in a positive (negative) bias for stock market returns before (just after) OE.
Doe stock market behavior during the month leading up to OE affect the return on OE?
The following scatter plot relates return on the OE date to the return from the close on the preceding OE through the day before OE. For example, if two successive OE days are 5/15 and 6/19, the chart relates the return on 6/19 to the return during 5/15-6/18. The Pearson correlation between the two series is just 0.01 and the R-squared statistic is 0.00, indicating no relationship. Perhaps dynamic hedging obviates any OE day price pressure.
In summary, evidence from simple tests offers some support for belief in a modest positive bias for the broad stock market a few days before and a negative bias just after equity option expiration dates.
