A Dangerous Week, Historically, for the Markets

01/18/2011 3:03 am EST

Focus: OPTIONS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

The S&P 500 Index (SPX) could be in trouble this week. Not only do January 2011 options expire, but this expiration will be far from your typical expiration week. Specifically, the week is shortened to just four trading days due to the Martin Luther King Jr. holiday. Since 2006, we've had only five four-day expiration weeks. Below are a few more points worth noting about the week's options expiration, all courtesy of crack senior quantitative analyst Rocky White:

1) Expiration week has been bullish overall since 2006, but the more recent expirations (since 2009) have been bearish.

2) January expiration has been very bearish since 2000. In fact, the prior six January expirations have been negative, with the last positive expiration occurring in 2004.

3) During the past year, seven expirations have been positive, while five have been negative, with an average return of 0.16%. The past four expiration weeks have been positive.

Taking a closer look at the data, the table below shows S&P 500 Index (SPX) returns for expiration weeks since 2006.


Click to Enlarge

The next table shows SPX returns for four-day expiration weeks. Notice that two of the three down days resulted in losses of more than 3%, including the last one in February 2010.

As you can see from the table below, January expiration week is typically not a happy one for SPX bulls. In fact, the past six have resulted in weekly losses for the index.

Finally, the table below contains the data for the SPX's returns during 2010 expiration weeks:

The takeaway: Be careful during a shortened options expiration week in January!

By Joseph Hargett, contributor, Schaeffer’s Trading Floor Blog

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