Why August Options Expiration Could Bring Some Fireworks

options trading stocksThis week is options expiration week, better known as OPEX.  Over the years, I’ve noticed this week tends to go the way of the overall trend, but also tends to be more extreme or magnified.  For example, some of the biggest drops back in 2008 tended to take place during OPEX, while more recently some of the best weeks during this bull market have taken place this week.

You could talk to 10 people and get 10 different answers as to why this is.  The reality is with so many option trades expiring during these weeks, there is a lot of volume and a lot of moving parts behind the scenes.  The smallest bits of news can be more extreme when you have this scenario.  The bottom line is options expiration tends to be more volatile than your average week.

Getting right to it, August has been one of the weaker months overall historically and looking at OPEX returns this is again true.  Over the past decade, August options expiration is up just 50% of the time and up only +0.03% on average.  Check out the January returns.  By far the worst month, interesting.  Will have to remember that one early next year.

options expiration returns by month

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Looking at just August OPEX weekly returns you can see it has been down three of the past four years.  In fact, last year’s drop of -2.10% was one of the worst weeks out of all of 2013.

options expiration august performance

Turning to all the OPEX returns over the past 12 months and it is clear options expiration week in general is usually bullish, with a very solid weekly return of +0.94%.  Again, this shouldn’t be a big surprise as we’ve been in a very strong bullish trend most of this time.

options expiration weekly returns by month

What stands out the most to me above though is last August’s drop of -2.10% is actually the worst weekly OPEX return over the past year and it isn’t even close.  The other drops over the past year were marginal at best at -0.20%, -0.13%, and -0.03%.

Lastly, here is the day-by-day break down for each day of the week during August options expiration going back to 2004.  Thursday is the big loser, down -0.52% on average, before a decent bounce back on Friday.

august options expiration performance by day

With all the potential geopolitical news out there from Iraq, to Ukraine, to Israel, be careful out there this week is my best advice.  Friday’s big reversal has many excited and it is a great step in the right direction.  But historically this week hasn’t been very good and should we see some big news from any of the major conflicts out there, the stage is set for potentially more pain simply because it is OPEX and not a regular week.

Follow Ryan on Twitter:  @RyanDetrick

No position in any of the mentioned securities at the time of publication.  Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.