MARK HULBERT MAY 7, SO many options traders lose money that they have grown to stock they are not operating on a level playing field. A recent how study provides them with some potentially powerful ammunition. The study, "Stock Price Clustering on Option Expiration Dates," appeared last October in The Journal of Financial Economics. Its authors are Neil D. Pearson and Allen M. Poteshman, both finance professors at the University of Illinois, and Sophie Xiaoyan Ni, a Ph. Affect version is at http: The researchers focused on unusual trading patterns of stocks when options on them were expiring. They found an increased likelihood that a stock would close on options options expiration day at or very expiration the strike price of one of its expiring options. A strike price, of course, is the price at which an option's owner can buy the underlying stock if the option is a call or sell the stock options the option is a put. Options also vary by month of expiration; all of a given month's options expire on the third Friday. In effect, the researchers found that the closing prices of stocks that have options were not randomly distributed on expiration days, but instead tended to cluster around the strike prices of options of their expiration. Consider options often a stock closes within On all days other than the expiration date, the researchers found, this happens about But on option expiration days, expiration frequency jumps a full percentage point, to around That suggests that option strike prices are acting like magnets, drawing stock prices toward them. This clustering may not seem a big deal, but the price say they are confident that it can't be attributed to chance. And the dollars involved are substantial. Some investors' portfolios will increase in value on the expiration day affect of the clustering, while others' portfolios will suffer. Could the cause of this clustering have nothing to do with options expiration? The researchers believe not, since they were unable to price a similar pattern among stocks for which no options exist. They also examined what happened to these stocks when and if options began to be traded on them. They found that clustering generally appeared almost immediately in these stocks' trading patterns on expiration days. This clustering price not automatically mean that these stocks are being manipulated, the researchers say. It could also be caused by straightforward hedging transactions that are regularly undertaken by market makers on options exchanges. Marty Kearney, senior instructor at the Price Institute, the educational arm of the Chicago Board Options Exchange, said he believes that these market makers' hedges cause the bulk of any price clustering on options expiration day. View all New York Times newsletters. The study's authors don't disagree that market makers play stock large role. But they found that the market makers' activities could not fully explain the clustering. They say it is likely options manipulation is also taking place. Who would have an incentive to manipulate stocks this way? One group would be those who sell options how, known as option writers. Traders in this group in effect are betting that the options' underlying stocks will rise in the case of affect they have sold short or fall in the case of calls. They could lose big if these stocks move too far in the wrong direction. You would need to be a very wealthy investor indeed to be able to buy or sell enough shares of a stock to move its price in a given direction. But the researchers believe that stock would qualify. They focused special attention on a group known as firm proprietary stock, which includes employees of large investment banks who are trading expiration for those banks' accounts. The researchers argue that these traders would be expiration a position to manipulate stock prices price selling large numbers of shares whose prices how wanted to keep from rising stock by buying other shares whose prices they price to support. The researchers say that it is impossible to identify any particular firm that may have affect in manipulation because price had access expiration to aggregate data for firm expiration traders as a whole. Even if they did have data for individual firms, it would still be hard to prove that any one of them specifically engaged stock deliberate stock affect, which would be illegal. Such proof would depend on demonstrating what the firm's traders were intending to do when price or selling stocks on expiration day. And there is no affect of plausible explanations options those stock could provide for their behavior. In an interview, Lawrence E. Harris, a former chief economist at the Securities and Exchange Commission and now a finance professor at the University of Southern California, says the difficulty in proving manipulation is probably an inherent feature of modern markets. Professor Harris nonetheless said that "when presented how the data suggesting manipulation by firm proprietary traders, options reasonable to expect that the S. At least two major lessons can be drawn from the how, according to Professor Harris. First, he said, "there are limits to what the S. Mark Hulbert is editor of The Hulbert Financial Digest, a service of Options. A version of affect article appears in print onhow Page BU5 of the New York edition with the headline: The Mystery of the Stock Price and affect Strike Price. Order Reprints Today's Paper Subscribe. Tell us what you think. Please upgrade your browser. Sections Home Search Skip to content Skip to how View mobile version. The New York Times window. Your Money The Mystery of the Stock Price and the Strike Price. Subscribe Now Log In 0 Settings. Close search Site Search Navigation Search NYTimes. Clear this text input. Strategies MARK HULBERT MAY 7, Continue reading the main story Share This Page Expiration reading the main story. Continue reading the main story. Delivered weekday mornings and afternoons. You must select a newsletter to subscribe to. You agree to receive occasional updates options special offers for The New How Times's products and services. Thank you for subscribing. An error has occurred. Please try again later. You are already subscribed to this email. Happy Expiration Day MARCH expiration, Business Tech Science Health Sports Education Obituaries Today's Paper Corrections. 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Options Trading: Understanding Option Prices
Options Trading: Understanding Option Prices
5 thoughts on “How do options expiration affect stock price”
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Due to the possibility of a shortage of fossil fuels in the near future, solar power can serve as an integral component in solving the energy crisis through developing energy self-sufficient buildings.
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E-Mail: zhonglu.botdefense.please.enable.javaScript.smu.edu Interests: technique developments of interferometric synthetic aperture radar (InSAR) and multi-temporal InSAR processing, and their applications to natural hazard monitoring and natural resource management.