Options Expiry Date

[makeorbreak]

Hi - I'm new to options and I would like to ask question.

Considering today is the expiry date for june, how does this affect the stock price? and, what kind of effect will it have tomorrow if any?

Thanks

 

[wayneL]

Hi MOB

There is the theory of "max pain". That is the tendency for the stock price to "pin" at the strike where the maximum number of options expire worthless. The theory is, that it occurs as option market makers try to get themselves flat by buying and selling stock, forcing the price towards the strike price.

It is not a conpiricy or a plot to rip off retail traders, just market forces at the big end of town... supply and demand under special circumstances

Like all market maxims, it is absolutly true, and can be traded....sometimes.

Other times, other market forces may completely overide this phenominum.

It is one to watch if you have the time. I don't really bother too much myself.

cheers

 

[wayneL]

Here is a 54 page paper on the topic if so motivated to read it.

http://www.business.uiuc.edu/poteshma/WorkingPapers/NiPearsonPoteshman27August2004.pdf

Cheers

 

[sails]

Hi - I'm new to options and I would like to ask question.

Considering today is the expiry date for june, how does this affect the stock price? and, what kind of effect will it have tomorrow if any?

Thanks

Hi Makeorbreak,

The maximum pain theory is an interesting concept and while I have seen it work with amazing accuracy at times, I haven't found it reliable as a stand alone. Sometimes I've seen the share price thrash around a certain strike price, eg. Santos was one of those today which range traded around the $11.50 strike all day.

The only effect this should have on tomorrow will be excessive volume due to in-the-money options being exercised overnight.

Hope this helps!

 

[EllKayBee]

The only effect this should have on tomorrow will be excessive volume due to in-the-money options being exercised overnight.

Interesting - did a quick check STO volume highest since 5 Jun and less than one hours trading att, nice call

Les