Options trading rules
Options in Expiration week
If there’s a lot of buying/selling pressure during expiration week, the trend will likely continue into the next week.
If the day of expiration (Friday) is down, the day-after options expiration (Monday) tends to be a down day, and vice-versa.
Wednesday through Friday, options expiration week usually has a “bullish” trend, which will push the market up.
In terms of months, April tends to be the most bullish month around options expiration week.
Witching happens four times a year, it is when many things expire at the same time. It happens on the third Friday of March, June, September, and December, every normal quarter. Four products expire at the same time: futures, futures options, equity options, and weekly options. This is commonly referred to as “quadruple witching”. The Wednesday, Thursday, and Friday the week before expiration, volume increases as the professionals are already unwinding their positions. The Tuesday and Wednesday of expiration week, there is going to be more volatility and volume, because by the time Thursday and Friday come, most of the professionals want to be out. They don’t want to take any more risk. Big traders will have the major stocks, like General Electric (GE), IBM (IBM), against futures. So it is a basket of stocks versus futures. They may be long one, short the other, and they start unwinding the individual stock names versus the basket.
“Weird Wollie Wednesday”, created by Don Wolanchuk, references the Wednesday prior to options expiration. This day is made up of manipulated price action which is primarily related to the faster deterioration of options premiums during the week prior to options expiration; many traders are rebalancing and rolling their options forward. The Wednesday 9 calendar days before options expiration (and especially on quarterly options expirations that are called Triple-Witching) tends to see the market close in the opposite direction of the expiration day (Friday). In other words, Wednesday’s (before expiration) big up-close would signal a big down-close for the expiration (Friday).
Before Expiration week
The S&P tends to make a low on the Thursday or Friday the week before the expiration. The rule is to look to buy weakness on that Thursday or Friday, looking for a low to hold into Monday or even into the expiration itself. Generally, the trade is to buy on Friday and hold into Monday.
Turnaround Tuesday. If $SPX closes down for the 2nd or 3rd day in a row, buy on Monday’s close, sell on Tuesday’s open.
The first of May, a relatively strong day for the stock market, has seen the S&P 500 rise an average 0.48% the last 20 years.
Window Dressing – a strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter.
Mutual Fund Monday. The mutual funds use Mondays as a favored day for the portfolio managers to buy stock. Traders look to buy on Friday and hold into Monday/Tuesday’s open.