Good Chance for the Market Close on High on Expiration Week

From OP Contributor – Jiayu Chiu

I have noted that expiration week is the most bullish week in a month. For the past 2 years, there is high percentage of SPX close on high in the expiration week in a month. Let see this month of statistics on how the SPX close :

Feb 2007 : 2.4 points from high of the month.

Let look the statistics for the past 16 months :

From Nov 2005 to Feb 2007 (16 months), there is more than 75% chance that the SPX closes on high on the option expiration date. 10 months closed less than 5 points from the high of the month, 2 months closed between 6-9 points from the high.

The study starts from the first day of the expiration month, for example in the month of Dec 2006, that was 20 Nov 2006, till the last day of the Dec 2006 trading day, that was 15 Dec 2006. Separately there are 10 months from Nov 2005 to Oct 2006, that the index closed less than 10 points from the high of the month. Just to list the month in details (closing SPX price from the high of the option month):

1. Nov 2005 : 1.3 point
2. Dec 2005 : 8.5 points
3. Feb 2006 : 2.2 points
4. Mar 2006 : 3.2 points
5. Apr 2006 : 6.9 points
6. Aug 2006 : 0 point
7. Sep 2006 : 5.0 points
8. Oct 2006 : 4.2 points
9. Nov 2006 : 2.6 points
10. Dec 2006 : 4.6 points
11. Jan 2007 : 4.8 points
12. Feb 2007 : 2.4 points

What are the suitable strategies for this observation ? One of them might be to buy a 2 month ATM VIX Put one week on the first monday morning. We all know that VIX generally goes down when the broader market goes up in price. With 2 months ATM VIX Put we do not lose much in time decay. Let take for example this Feb 2007 month, VIX was 11.10 on 9 Feb 2007, the Apr 11 Put was doing around $0.4, the VIX was 10.05 on 16 Feb 2007, the Apr 11 Put closed at around $0.55.