But what if only Friday is down big? In a related manner, on Friday, February 2nd, of this year, $SPX was down by 2.1%.  Then, on Monday, it collapsed 4.1%.  So I wanted to see if a Friday collapse alone of 2% was significant.  There have been 65 such occurrences since 1950.  And it’s almost a coin flip as to how Monday after a 2% down Friday is going to turn out.  There have been 32 Mondays that were higher, 31 that were lower, and 2 that were unchanged.  Furthermore, the median move is literally 0%.  The average move is –0.6%, but that’s because the Crash of ‘87 throws a huge number in there on the minus sides (-20.4%).  

Whether up or down, the absolute value of the average move is 1.8% – again, worth buying a straddle or setting up the VXX/SPY call hedge.  But wait!  1987 is skewing that.  The median move is 0.9%.  That’s not necessarily going to produce a profit, especially if options’ implied volatility is pumped up on Friday’s close after the big down day.  

I would have thought that such a negative Friday move would carry over into more selling on Monday.  But the statistics don’t agree.  Moreover, it’s not really clear that a “neutral” strategy would profit, either.  I suppose you have to look at things on a case-by-case basis.  If the options are not overly expensive, or if there is a large discount on the front-month $VIX futures, then the hedged strategy might make sense.  Otherwise, probably not.

Just FYI, the following table shows the most recent “down 2+% Fridays:”

Five of the last six have been sizeable moves (although two are duplicates from the above table).

In summary, it’s likely worth investigating the VXX/SPY hedge on Friday’s close when these set up.

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