The Rude Awakening
Laguna Beach, California
Friday, August 18, 2006 ------------------------- - An options phenomenon worth considering,
- A rising energy tide floats most boats,
- Learn how to master options trading and more...
------------------------- A Fascinating Fluke
By Eric J. Fry We are not sure that it means anything, but neither are we
sure that it doesn't: The XOI Index of oil stocks is
falling like a cradle from a treetop. The fact that oil stocks would drop is, in itself, not very
remarkable. But the TIMING of the current drop may be. In
each of the three preceding months, the XOI Index has
dropped sharply, immediately prior to the monthly
expiration of equity options (which falls on the third
Friday of every month). And in each of the three preceding
months, the XOI Index has rebounded sharply immediately
AFTER options expiration. 
This curious pattern does not necessarily contain any
message of value, but it appears to be repeating itself
once again. Oil stocks have been falling for the last
several days...and today marks the expiration of August
equity options. A fluke or a buy signal?...Let the reader decide. But before deciding, consider these remarkable data: During the 10 trading days prior to each of the last three
monthly option expirations, the XOI Index dropped every
time, averaging a decline of 3.9%. Conversely, during the
10 trading days following each of the last three option
expirations, the XOI Index rallied every time, averaging a
gain of 6.6%. Expressed another way, if an investor had purchased the XOI
Index on each of the three prior option expiration days,
and held that position for 10 days each time, he would have
gained a total of 21%. On the other hand, the hypothetical
investor who purchased the XOI Index 10 days prior to
expiration and sold the position on each expiration day
would have lost 14%. We don't know why this phenomenon has occurred, nor whether
it will repeat itself. But we would not be surprised if a
valid, fundamental reason underpinned these seemingly
random occurrences. Perhaps, for example, the recent manic-
depressive trading action in the oil stocks reflects the
manic-depressive trading action of hedge fund managers. If
they express their alternating greed and fear through the
alternating purchase of calls and puts, their actions
could, theoretically, influence the direction of big-cap
oil stocks...at least for a while. We would never attempt, nor suggest attempting, trying to
trade this option-cycle phenomenon. Rather, we would note
that investors who harbor bullish sentiments about oil
stocks might wish to express their bullishness most
forcefully in the first or second day after options
expiration. [Joel's Note: While it's true that playing options can
offer a tremendous upside opportunity for your portfolio,
they can also be risky and difficult to grasp. That's why
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