Options Expiration Cycles – Four Week or Five?
by Ian Harvey
August 20, 2012
We just passed the third Friday of the month, meaning equity options expired. The third Friday of September, however, occurs on the 21st. One thing to note is this next expiration cycle is five weeks long, rather than the typical four weeks. As more and more stocks trade weekly options, the regularly scheduled options expiration may mean less and less. However, let’s take a look to see how these "long" expiration cycles played out for the market, compared to the shorter four-week cycles.
5-Week Versus 4-Week Cycles
Below is a table summarizing S&P 500 Index (SPX) returns during four-week expiration cycles and five-week cycles going back to 2009. Though the market has done very well over this time frame, the five-week cycles average a negative return, significantly underperforming four-week cycles. The last two columns reveal the main reason why. The longer-term cycles saw positive returns outnumber negative ones by two-to-one (10 positive returns compared to five negative ones), but those negative cycles contained huge losses. In fact, among these five losing cycles, there were three notable declines of 8.8%, 9.4%, and 14.6%. As a result of these three readings, the average return is in the red by a notable margin.
Under-performance of Five-Week Cycles
Below is a table that breaks down the five-week options expiration cycles by week. So at what point does the five-week cycle tend to underperform? Three of the five weeks have averaged a negative return, but it's that fifth week that is most bearish. Since 2009, expiration week in a five-week cycle has been negative more than half the time, with an average loss of 0.72%. The good news from that table shows the first week -- which would be this week coming up -- has averaged a positive return and has been positive 60% of the time. The second table below shows the same data for four-week cycles as means of comparison. Those have been pretty consistently strong throughout the cycle.
Finally, below is a table breaking down the individual five-week cycles since 2009. Shown are the returns for the first week and for the entire cycle. Note that the last four cycles have bucked the trend since 2009 that is shown above. Since 2009, the first week of the long cycles average a positive return but three of the last four have been negative. However, the entire cycle averages a loss of 0.35%, but three of the last four have been positive.