Option Expiration Week Returns and Market Maker Hedging

Summary

The document describes a calendar strategy for large-cap stocks with active options: hold S&P 100 stocks during the week containing the monthly third Friday, then remain in cash during other weeks. It reports that these stocks tend to have higher average returns in option-expiration weeks, relative to their own other weeks and to stocks with less options activity. The cited paper also finds modest underperformance in the following week.

The proposed explanation is that option market makers reduce short-stock delta hedges as near-term call open interest declines into expiration. Falling option-implied volatility may also contribute. The document presents the timing rule as a simple market-timing approach, but says it is long-only equity exposure and unsuitable as a crisis hedge or diversifier. It does not provide detailed transaction-cost analysis or establish that the pattern will persist; results and implementation depend on the cited research and the chosen trading universe.

Key ideas

• Large-cap stocks with actively traded options have shown elevated weekly returns around monthly option expiration.
• A simple rule holds S&P 100 stocks during the week containing the monthly third Friday and stays in cash otherwise.
• The proposed mechanism is reduced market-maker short-stock hedging as near-term call positions expire.
• The cited study reports modest weakness in the subsequent week and discusses declining implied volatility as another contributor.
• The strategy remains long-only equity exposure and is not presented as a crisis hedge.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.