it’s that time of the month again - we heading into the widely dreaded option expiration week. Which is a great occasion to once again remind everyone of Tom Sosnoff’s 10 Golden Rules for Expiration Week:
Look for flat and range-bound markets after Wed. After a large move (usually on hump day - Wednesday), the markets go flat. Reason is that most of the churn is done at the move day. Don’t expect large back-to-back moves. Look for flat and range bound trading.
There tends to be a continuation of the major trend. Buy the dips - sell the rips! Expect to get buying/selling pressures into the following week. Don’t be a contrarian! If it’s bullish you should be buying dips, if it’s bearish you should be selling rallies.
Wed-Fri of expiration week have historically a bias to the buy side. There is an enormous amount of arbitrage going on. It happens to be one of the more bullish times of the months. Most professional traders are very flat during that time - and if for instance they have an open SPY position, it makes them very nervous to have exposure to the upside.
It is best to be out of your front-month positions by Wed of expiration week. If you are expecting a certain move and it hasn’t happened by Wed, you want to get whatever salvage value there’s left. Or if you’re in a good position that cost you some money, you don’t want to go into the delta/gamma risk and Wed should be your close day. Don’t get too greedy during expiration week.
The Monday after expiration is one of the most liquid trading days of the cycle. Under normal circumstances (not right now) it is also the best day to get an option as close as possible to theoretical value, and it’s a great day to get involved if you missed establishing positions the prior week. It’s one of the more intense days and everybody is at work. Traders are less at edge. It’s a good day to establish new positions - as there is no front month expiration risk.
Stocks and options rarely lie going into expiration week. For whatever reason stocks that are strong tend to stay strong, weak stocks stay weak. Usually the market is very fairly priced.
Jan/Apr/Jul/Oct tend to be bullish months around expiration. Triple witching months tend to be a little flat. You have a triple witching cycle which is March, June, September, and December (3/6/9/12). The months following (1/4/7/10) have a historical bias to the upside.
Be strike-price aware! Remember that options have a tendency to go to the number that hurts the most people, which is a strike, some also call this pin-risk. Over time, certain stocks have a tendency to go the next strike price. Even the averages have a tendency to go to their nearest strike.
Close ATM positions prior to expiration. Your target spot is your at-the-money strike for at least half your positions no later than Wednesday. The expected move in the following days will take you away from your sweet-spot price. Again, don’t be greedy - we all know what happens to pigs!
Familiarize yourself with the 4 major futures food groups. Look at the Russel 2000, Nasdaq, S&P 500, and the Dow - a strong index will stay strong, and a weak index will be weak. You have to watch what pushes the markets: /ES, /NQ, /YM, /TF, as well as SPX, NDX, VIX.
AI
