Chicago Board Options Exchange (Image credit: Getty Images via @daylife)
By: Rocky White
This week brings us to the third Friday of the month, which means equity options expire. Since we specialize in options trading, we look very closely at the market's performance during this week.
Below is some historical data on expiration week. Specifically, you can see the returns for the S&P 500 Index during triple-witching expirations, March expirations, and finally, when CBOE Market Volatility Index (VIX) options expire -- or, more appropriately for this week, don't expire -- during the week of expiration.
Expiration Weeks since 2006: March is a triple-witching expiration -- which means not only do equity options expire this week, so do stock market index futures and index options. Many pundits claim we should be be ready for some heightened volatility this week, but the numbers don't show that to be true.
Below is a table summarizing weekly SPDR S&P 500 (SPY) returns since 2006. You can see triple-witching expirations are very bullish, while the other expiration weeks underperform. Note that the standard deviation of returns for the triple-witching weeks is significantly lower than other weeks. By this measure, volatility is actually much lower during these special expiration weeks compared to other weeks.
This next table shows returns for only March expiration since 2006. Again, this week is historically bullish. The week of March expiration averages a 1.01% return and has been positive five of seven times. Therefore, March is strong even by the higher standards of triple-witching expiration weeks.
VIX Expiration: One fact about this particular expiration, which is good to know later in the week, is that the front-month VIX series does not expire this week. VIX options expire once a month on Wednesday mornings. Sometimes they expire during the week of expiration, and other months they don't.
This month, they happen to expire the week after expiration. I went back to 2010 -- since that's when VIX option volume really picked up -- and compared expiration weeks when the VIX expired on that Wednesday against those weeks when VIX did not expire. If you're holding options in the middle of the week that expire on Friday and you're not sure whether to close them or not, maybe this data will help.
We've long held a view that when the VIX series expires, it ushers in a slew of VIX call buying. VIX calls are used to hedge long stock positions, so when the VIX calls expire, new ones are bought to maintain the hedge. This activity can create a headwind for the market. The table below shows the returns for the SPX from Wednesday through Friday on expiration weeks when the VIX series also expires versus those weeks when VIX doesn't expire.
The returns are very good when the VIX does not expire during expiration week, which is another piece of bullish news for this upcoming week.
