The option-expiration week is a week before options expiration (Friday before each 3rd Saturday in each month). Large-cap stocks with actively traded options tend to have substantially higher average weekly returns during these weeks.

A simple market timing strategy could be therefore constructed -> hold the largest stocks during the option-expiration weeks and stay in cash during the rest of the year.

Fundamental reason

Academic research suggests that intra-month weekly patterns in call-related activity contribute to patterns in weekly average equity returns. Hedge rebalancing by option market makers in the largest stocks with the most actively traded options is the main reason for the abnormal stock’s returns. During option-expiration weeks, a sizable reduction occurs in option-open interest as the near-term options approach expiration and then expire. A reduction in call-open interest should be associated with a reduction in the net long call position of market makers. This implies a decrease in the short-stock positions being held by market makers to delta hedge their long call holdings.

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Markets Traded
equities

Backtest period from source paper
1988-2010

Confidence in anomaly's validity
Strong

Indicative Performance
9.3%

Notes to Confidence in Anomaly's Validity

Notes to Indicative Performance

per annum, calculated as return for holding stocks during 12 option expiration weeks (6,3%) plus expected return on cash position (3/4 multiplied by ~4%), stocks return is calculated as weekly return of 0.528% multiplied by 12, data from table 3


Period of Rebalancing
Weekly

Estimated Volatility
8.7%

Notes to Period of Rebalancing

Notes to Estimated Volatility

used data from table 3, estimated volatility for portfolio which is 1 week from month in a stocks and 3 weeks from month in a cash


Number of Traded Instruments
1

Maximum Drawdown

Notes to Number of Traded Instruments

Notes to Maximum drawdown

not stated


Complexity Evaluation
Simple strategy

Sharpe Ratio
0.61

Notes to Complexity Evaluation

Region
United States

Financial instruments
CFDs, ETFs, futures, stocks

Simple trading strategy

Investors choose stocks from the S&P 100 index as his/her investment universe (stocks could be easily tracked via ETF or index fund). He/she then goes long S&P 100 stocks during the option-expiration week and stays in cash during other days.

Hedge for stocks during bear markets

No - The strategy is timing equity market but invests long-only into equity market factor (even that only for a short period of time); therefore, it is not suitable as a hedge/diversification during market/economic crises.

Source paper
Out-of-sample strategy's implementation/validation in QuantConnect's framework (chart+statistics+code)
Other papers

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