George Washington had wooden teeth. Bulls get angry when they see the color red.
There are many commonly held beliefs that are, in fact, untrue.
Here’s a common stock market concept, one I heard stated as truth yet again a few days ago: the week of monthly options expiration often sees increased volatility, and whichever way the market moves during expiration week will be unwound in the opposite direction the following week.
While we at Granite Wealth have never crafted trades to “take advantage” of this concept, I’ve heard this statement so regularly over the years that even I figured it was probably true.
But is it?
As January’s monthly options expiration passed last Friday, I decided to dig into some data and see.
Turns out, the unwinding of options week theory is about as true as saying fortune cookies originated in China.
Over the last 2 years the record of post-option week unwinding has been spotty at best. For example, in just 5 of the 12 months during 2021 did this trade deliver. In 2022, it worked exactly 50% of the time. See for yourself in the chart below:
Maybe the concept of unwinding options expiration used to hold true many years ago. Perhaps the increased popularity of weekly options – which are less than 20 years old and occur on every Friday except when monthlies do, the third Friday of each month – has changed what used to be a reliable trade.
If a trader still wanted to try a one-week trade related to the monthly options expiration, how could it be done? Perhaps an order for an index ETF could be placed below market late in a down options expiration week. Most of the time, the order might not get filled but when it did, tight stops could be employed to limit risk while hoping to catch one of the following weeks when the market does snap back in the other direction.
Feels like a stretch, though.
For me, the data pictured above is enough. Personally, I’m looking for better than a 50/50 proposition when putting on positions for clients.
In March, we will circle back to options expiration with a look at the first Quadruple Witching date of 2023.
Until then, the next time you hear someone talk about trading to take advantage of options week unwinding, just file it away with the idea that bananas grow on trees!