David Bukey - The S&P Witch Project

8/7/2019 David Bukey - The S&P Witch Project

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I ts been more than 20 years since the Chicago Mercantileexchange (CME) launched its S&P 500 (SP) futures andoptions, but traders still seem puzzled about the effectsof triple-witching expiration days the two-dayperiods in March, June, September and December when stock-index futures, stock index futures options and equity optionsexpire on the same day. The general consensus is, the onlything you can expect is the unexpected.

With the introduction of single-stock futures contracts inNovember 2002, triple witching became quadruple witch-ing, as the last trading day for these new futures contracts

occurred around the same time as the other three instruments.(For more information regarding specific contracts expirationdates, see Expiration details.)

All four contracts end on the third Thursday and Friday ofeach quarter. At this point, traders must roll contracts forward,close their positions or let them expire.

Because these quarterly events bring higher volume andseemingly higher volatility, its not surprising the financialmedia watches both days closely. However, there is no solidevidence triple-witching days cause unique daily price moves.

Gary J. Santoni, professor of economics at Ball State

University, notes the S&P 500 hasntposted significantly larger averagedaily moves (up or down) duringtriple-witching Fridays compared toregular days. In fact, Santoni stateshis research is inconsistent with theclaims of critics that stock prices aremore volatile on days when futurescontracts are settled. (To rea dSantonis article Index arbitrageand stock market volatility, visitwww.cme.com/files/indexarb.pdf.)

We analyzed S&P 500 daily mar-ket behavior surrounding all quar-

terly triple-witching days as well asits price action around other con-tracts last trading day, or the thirdFriday of each serial month (e.g.,non-quarterly months, such asJanuary, February, April, May, etc.),to see how futures and optionsexpirations affected the market.

Overall, the S&Ps performanceon the third Thursday and Fridayof both triple-witching and serial

82 www.activetradermag.com December 2004 ACTIVE TRADER

MARKET History

The S&P Witch ProjectTriple-witching days when stock options, and index futures and optionsexpire simultaneously often make headlines, but traders should carefully

watch all expiration days. Find out how the S&P 500 behaves around futures

and options expiration.

BY DAVID BUKEY

0.03

0.02

0.01

0

-0.01

-0.02

-0.03

The market posted small, but consistent, gains in the week preceding futures and

options expiration. The final Thursdays and Fridays of these weeks (Day -1 and 1) were

surprisingly quiet. However, the S&P dropped sharply the Monday after expiration.

FIGURE 1 S&P 500 PERFORMANCE SURROUNDING ALL STOCK INDEX FUTURES ANDOPTIONS EXPIRATIONS (1982 TO 2004)

Futures and optionsexpiration

Benchmark

Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day-8 -7 -6 -5 -4 -3 -2 -1* 1** 2 3 4 5 6 7 8

Days before and after expiration

* Last trading day futures and options (quarterly months)**Expiration day futures and options (quarterly months) and last trading day (serial months); these options expire the next day (Saturday)


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months was unremarkable. Each month, the market rose in thethird expiration week and fell in the fourth, on average.However, the most interesting behavior was associated with

serial-month expiration periods, not triple-witching dates.

Futures and options expiration: 1982 to 2004To see how the market behaved surrounding futures andoptions expirations, we studied daily S&P 500 price movesprior to and following all 89 quarterly triple-witching days,starting with the CMEs first S&P 500 futures contract, whichexpired on June 18, 1982, and finishing with June 18, 2004. Wealso measured daily market performance before and after theexpiration of all 173 serial-month options on S&P futures con-tracts from their inception on Jan. 28, 1983. to Aug. 20, 2004.

The analysis window spans 16 days: eight days precedingexpiration Friday and the eight days following it, whichincludes the day itself.

Figure 1 shows the S&P500s daily average gains and lossesbefore and after the 262 futures and options expiration datesover the past 22 years. Day -1 is the final Thursday of each con-tract the last trading day for S&Pfutures and quarterly stockindex options. Day 1 represents the final Friday, or the lasttrading day for stock options, serial-month stock index optionsand single-stock futures (as well as the latter two instrumentsexpiration days).

The figure also compares each days price move to its bench-mark, or typical 0.05-percent daily price move during this peri-od. The market seems stagnant prior to expiration, as it out-performed its benchmark just half the time and moved 0.10percent or more on only three of the eight days. However, theS&P posted small, consecutive gains on the five days prior to

expiration, an average 0.49-percent gain over that period.

ACTIVE TRADER December 2004 www.activetradermag.com 83

Expiration details

Stock-index futures such as the S&P 500 (SP),

Nasdaq 100 (ND) and their E-mini counterparts

(ES and NQ, respectively) trade for three

months until the third Thursday before the end ofeach quarter. These futures settle to the cash index

at a special opening quotation (SOQ) on Friday morn-

ing and then expire. Fridays final settlement price is

based on each index components opening price (or

previous closing price if a stock never trades that

day).

The CME began using the SOQ settlement method

with its June 1987 contract to minimize the volatili-

ty that occurred as traders rushed to place closing

trades for stock index futures and their options on

Thursday. Prior to June 1987, stock index futures set-

tled to Thursdays close.

Monthly stock options and single-stock futures

have a different expiration schedule. The thirdFriday of each month is the last trading day for these

contracts; stock options expire on Saturday, and sin-

gle-stock futures expire at 10 a.m. (ET) the following

business day (usually Monday).

However, options on stock index futures have dif-

ferent expiration dates, depending on the contract

month. For example, options on S&P 500 and Nasdaq

100 futures follow the same schedule as the con-

tracts on which theyre based during the quarterly

months (March, June, September and December) and

end on Thursday. But in serial months, or the eight

remaining months of the year, options on stock index

futures end on Friday, as monthly stock options and

single-stock futures do.

The S&P gained more in the week before serial-month expirations than it did before triple-witching expirations and fell

further the following Monday (Day 2).

TABLE 1 DAILY MOVES SURROUNDING EXPIRATION: SERIAL MONTH VS. QUARTERLY TRIPLE WITCHING (1982 TO 2004)

Close Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day Daylocation: -8 -7 -6 -5 -4 -3 -2 -1* 1** 2 3 4 5 6 7 8

Serial-month option expirations (173 instances)

Average: 56.89 0.02% -0.08% 0.10% 0.09% 0.23% 0.13% 0.08% 0.11% -0.10% -0.29% 0.04% 0.21% -0.08% -0.02% 0.02% 0.19%

Median: 60.27 -0.02% -0.05% 0.08% 0.24% 0.18% 0.14% 0.08% 0.06% 0.02% -0.20% 0.06% 0.11% 0.00% 0.05% 0.03% 0.16%

Pct. > 0: 47.40% 46.24% 52.60% 59.54% 64.74% 54.34% 55.49% 56.65% 52.02% 40.46% 54.34% 58.96% 49.71% 51.45% 50.87% 60.69%

Triple-witching expirations (89 instances)

Avg: 61.07 0.05% -0.07% -0.27% 0.11% 0.10% 0.11% -0.05% -0.06% 0.12% -0.08% 0.07% 0.07% 0.01% -0.05% 0.05% 0.13%

Med: 68.14 -0.17% -0.01% -0.15% 0.16% 0.10% 0.09% -0.02% 0.04% 0.16% -0.08% 0.06% 0.03% 0.02% -0.04% 0.09% 0.04%

Pct. > 0: 41.57% 49.44% 41.57% 55.06% 58.43% 51.69% 47.19% 53.93% 60.67% 40.45% 51.69% 50.56% 52.81% 44.94% 55.06% 53.93%

1-day average price move 0.05%

* Last trading day futures and options (quarterly months)

**Expiration day futures and options (quarterly months) and last trading day (serial months); these options expire the next day (Saturday)

continued on p. 84


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The market drifted sidewaysduring the final two days off u t u res and options contracts(Day -1 and 1, respectively) andplunged an average 0.22 percenton the following Monday, or the

second day following expira-tion. The market rebounded twodays later, but it then treadedwater towards the end of thatweek.

Serial-month vs. triple-witchingexpirationTable 1 (p. 83) breaks down theS&Ps daily performance intoserial-month and triple-witchingexpirations. The table compareseach categorys average andmedian price moves. Notable

d ifferences between the num-bers suggest the average hasbeen distorted by a few extreme-ly large or small values, which means the median is likely morerepresentative of the days typical move. (For details regardingthese statistics, see Average and median, p. 85.)

The first column shows the S&Ps average close locationwithin the daily range on the contracts final Friday. For

instance, if the market closed at the midpoint between theintraday high and low, its close location equals 50; extremecloses are 100 and 0, respectively.

The remaining 16 columns represent the average daily gainsand losses for the eight days leading up to the final Friday (i.e.,expiration of the quarterly S&P futures and options) and theeight days following it. Each categorys final row shows thedays percentage of positive moves.

The index tended to climb higher in the days prior to serial-month expirations, and posted six consecutive daily gainsfrom the sixth day to the final day preceding the event, a 0.74-

percent average gain for this six-day period. The market thensold off on expiration day and the following Monday.

In fact, the second day after serial-month expirationsmarked the largest daily market move (-0.29 percent) in thetable. While the S&P regained some of its prior losses on thefourth day, the market drifted towards the end of the first weekbefore rising again on the eighth day.

Market behavior surrounding triple-witching expirationdays was less dramatic. The S&Pmoved less than 0.15 percent,on average, in 15 of the 16 days in the table. The one exceptionto this rule occurred on the sixth day before triple-witchingday when the market sank 0.27 percent.

Triple-witching market moves were also less consistent: Themarket rallied moderately and beat its daily benchmark from

the fifth day to the third day prior to triple witching. The S&Palso gained ground on expiration day and towards the end ofthe following week, but these periods were brief and are lesscompelling than serial-month-expiration patterns.

Serial-month patternsFigure 2 shows the average daily S&Pperformance before andafter both serial-month and triple-witching expiration. The dif-ferences between the two expiration types are significant: TheS&Ps average daily price swings (up or down) are not onlylarger surrounding serial-month expirations, they also are


0.03

0.02

0.01

0

-0.01

-0.02

-0.03

-0.04

The S&P moved more dramatically before and after serial-month expirations than

around quarterly triple-witching expirations. The S&P sank an average of -0.29 per -

cent the Monday after serial-month expiration.

FIGURE 2 EXPIRATION DAYS: SERIAL MONTHS VS. TRIPLE WITCHING

Serial-month Overall Benchmark Quarterly tripleexpiration expiration witching

Expiration type

0.63

0.42

0.21

0.00

-0.21

0.45%

0.37%

-0.16%-0.11%

0.23%0.22%

0.01%

Expiration week

Succeeding week

The market rose the week futures and options expired

and sold off following expiration. Serial-month expira -tion is the best example of this pattern: The S&P

climbed an average 0.45 percent during expiration and

dropped 0.16 percent the succeeding week. However, the

S&P performed in line with its weekly benchmark price

move during quarterly triple witching.

FIGURE 3 AVERAGE WEEKLY S&P 500 MOVES:EXPIRATION VS. FOLLOWING WEEK

Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day-8 -7 -6 -5 -4 -3 -2 -1* 1** 2 3 4 5 6 7 8

Days before and after expiration

* Last trading day futures and options (quarterly months)**Expiration day futures and options (quarterly months) and last trading day (serial months); these options expire the next day (Saturday)

Serial monthsonly (173 instances)

Triple witching only(89 instances)


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more reliable than their triple-witching counterparts sincetheyre based on nearly twice as many observations (173 vs. 89instances).

The figure highlights the same pattern surrounding serialmonths that appeared in Table 1: bullish before expiration, fol-lowed by a brief market swoon and subsequent rebound. In

contrast, the market didnt significantly anticipate or react totriple-witching expirations (at least on a daily basis).

Weekly averagesFigure 3 compares the S&Ps average performance during expi-ration week to the week following it and breaks down thesedifferences into four categories: overall, serial-month andtriple-witching expirations as well as the weekly benchmark,or typical five-day average S&P move over the past 22 years.

The figure confirms that the market tended to rally duringexpiration week and decline in the wake of expiration. Again,serial-month expirations are the best examples of this pattern.The S&P climbed an average 0.45 percent in expiration weekswhen triple witching did not occur and

sold off 0.16 percent in the succeedingweek.

H o w e v e r, as previous figures andtables suggest, triple-witching weekswere nothing unusual and performed inline with the benchmark. Also, the S&Pwas flat following these quarterly events.

Extreme closesDays on which the market closes atextremely high or low levels can some-times lead to a continuation or reversal ofthis initial thrust. Figure 4 shows theaverage daily S&Pperformance of all 262

final Fridays and compares it to marketbehavior after strong and weak closes,defined as Fridays that closed within theupper and lower 20 percent of theirrange, respectively.

The figure also shows how the marketfared in the subsequent seven days andshows that strong closes didnt lead tofurther gains, but weak closes did triggeradditional short-term weakness. Thoughstrong-close average gains were 0.75 per-cent on the final Friday, the market didntbudge on the second day. Also, the remaining six days follow-ing strong closes lacked clear trends.

However, weak closes added to their 1.26-percent averageloss by sinking 0.61 percent the next day. This pattern thenreversed on the third and fourth days as the S&Prallied slight-ly before drifting sideways and climbing towards the end ofour analysis window.

To find out whether these tendencies differed following seri-al-month and triple-witching expirations, we broke out strongand weak closes by expiration type. Figure 5 (p. 86) shows howthe market reacted to strong and weak closes on the last trad-ing day of serial-month contracts. Though the S&Ps lacklusterresponse to strong closes also appeared after serial-month

expirations, its behavior following weak closes intensified.Comparing Figure 4s overall weak-close average loss on the

second day to Figure 5s serial-month counterpart (-0.61 and1.05 percent, respectively) shows that sharper drops tend tofollow weaker closes in serial months, not after quarterlytriple-witching ones (not shown).

The market reversal that appeared on the third and fourthdays after all weak closes is more abrupt after serial expira-tions. For example, the market rebounded an average 0.16 and0.34 percent, respectively, on those days following all finalFridays, yet it snapped back 0.31 and 0.62 percent, respective-ly, after serial-month expirations.

ACTIVE TRADER December 2004 www.activetradermag.com 85

continued on p. 86

Day 1* Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8

Days after triple witching (Day 1 = expiration day)

*Expiration day futures and options (quarterly months) and last trading day (serial months);these options expire the next day (Saturday)

1.00

0.75

0.50

0.25

0.00

-0.25-0.50

-0.75

-1.00

-1.25

-1.50

Strong close

Weak close

All instances

The S&P failed to continue its rally following strong closes. While the market

dropped the day after weak closes, it regained ground on the third and

fourth days.

FIGURE 4 FINAL FRIDAY EXTREME CLOSES

Average and median

The average (or mean) of a set of values is the

sum of the values divided by the number of

values in the set. To calculate the average of

a set of 8 numbers, add them and divide by 8.

However, extremely large or small values can dis-

tort a sets average. For example, the average of 23,

24, 25, 26, 27, 28, 29, 99 is 35.13 (281/8). But if you

remove the last value, the average is 26, a number

more typical of the majority of values in the data

set.

The median is the middle value in a data set when

the set has an odd number of values and the average

of the two middle values when the set has an even

number of values. Unlike the average, a median is

less likely to be skewed by a small number of non-

representative numbers in a data set. The median in

the prior example is 26.5, which is more representa-

tive of the data set than the average (35.13).


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ConclusionThe analysis presented here seems to contradict conventionalwisdom that triple witching is quite volatile. This is in line withprevious research that has shown triple witching doesnt affect

the market as much as one would think.Also, this discussion doesnt addre s sintraday S&P 500 price action on futuresand options contracts last trading day orexpiration day.

These figures suggest many tradingopportunities, though none of theminvolve being in the market during thelast trading day or expiration day.Instead, Figure 2 indicates the best one-day trade is to sell the S&P short at theclose of the last trading day of serial-month contracts (Day 1) and exit thetrade one day later. This trade should bemore profitable if the S&P closes in thelower 20 percent of its range that day.

Traders looking for a longer- t e r mtrade should go long on the sixth daybefore serial-month expiration and exit atthe close immediately prior to the lasttrading day.

While these tendencies are based on areasonable number of occurrences, its

wise to trade them only if they correspond with other tradingsignals.

Kesha Green contributed to this article.


The market fell an average of -1.05 percent on Mondays after serial month

last trading days (Day 2). The S&P then bounced back on the third and fourth

days.

FIGURE 5 SERIAL MONTH EXTREME CLOSES

Day 1* Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8

Days after triple witching (Day 1 = expiration day)

*Expiration day futures and options (quarterly months) and last trading day (serial months);these options expire the next day (Saturday)

1.00

0.750.50

0.25

0.00

-0.25

-0.50

-0.75

-1.00

-1.25

-1.50

Strong close

Weak close

All serial-month

option expirations

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David Bukey - The S&P Witch Project