Are stocks hampered by option expirations?

Discussion in 'Options' started by steve0580, Jan 23, 2006.

  1. I've been watching AAPL recently and although I saw the negative reaction to the earnings, I did notice that it drifted down the last couple of days before the January options expiration.

    A poster on another message board had made the commentary last Thursday or Friday that we should not expect an upswing until Monday due to this fact.

    Could there be any truth to a statement like this? Could a MM have a financial interest in keeping a stock down until after expiration? Would a MM be able to produce enough of an edge to sway a security like this? If so, wouldn't it be illegal?
  2. I think that to a degree it is influenced. There is an idea that is called the maximum pain theory(google it), it suggests that stocks will drift towards the strike price with the most open interwst just before expiration. Being aware of the idea is something that can help you time trades better but I would not validate it with trading solely on that premise.
    Sorry to be so vague
  3. MTE


    MMs wouldn't be able to generate enough force to push the stock to the strike by themselves as MMs don't trade just for the fun of it, but what may happen is that speculators tend to be long slightly ITM options, so when then start to unwind say slightly ITM calls the market makers have to buy those calls and then hedge their deltas by selling the stock short thus pushing the stock towards the strike price.

    As the previous poster said, it's worth being aware of, but not something to solely rely on to make trades.
  4. Moreagr


    hmm seems real interesting.. is there a informative site that explains this in more detial??
  5. MTE


    Google "Max pain theory". Also the explanation that I gave is given by one of the "Wizards" in the Schwager's "Market Wizards" book, I think it is the second one (there aren't that many option traders in the first two books so shouldn't be hard to find it)