I'm having some difficulties in understanding the effects of option expirations on stocks ? Can someone help elaborate more on the subject? Thank you!
It doesn't. This is just a myth. It's assumed it adds a bit more volatility, but nothing anyone cares about.
Look at open interest on the $OEX, $SPX, $NDX options and you can find the sweet spot where the most options expire worthless, that's usually where we end up. You can fade large moves away from that area during OX week, similar to today.
Abstract: This paper presents striking evidence that option trading changes the prices of underlying stocks. In particular, we show that on expiration dates the closing prices of stocks with listed options cluster at option strike prices. On each expiration date, the returns of optionable stocks are altered by an average of at least 16.5 basis points, which translates into aggregate market capitalization shifts on the order of $9 billion. We provide evidence that hedge re-balancing by option market-makers and stock price manipulation by firm proprietary traders contribute to the clustering. cont on link... http://papers.ssrn.com/sol3/papers.cfm?abstract-id=519044