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Thursday, December 14, 2006

The Conspiracy of Expiration

With Dec options expiration coming up this Friday, I thought I'll talk about what is commonly known as the conspiracy of expiration ~ the Pinning Effect. According to the Investopedia, Pinning is defined as "The tendency of a stock's price to close near the strike price of heavily traded options (in the same stock) as the expiration date nears."

But what criteria have to be fulfilled before we consider the stock to have the potential for pinning? After looking at some videos at TheStreet.com TV on this topic, this is what I've gathered:

-Pinning usually occurs about 2 days before expiration. Any earlier is probably...too early

-How big is the open interest and its relativity to daily stock trading volume. Open interest of at least 20% of daily trading volume is suggested for significance

-Big open interest is balanced on both sides of Call & Put

-Low volatility

-More likely in lower volume stock (less liquidity) where market makers can control trading activity

Adam discusses about pinning on XOM and GS. Have a look at AAPL and GOOG, both are now trading close to strike of $90 and $480 respectively. These 2 stocks certainly don't fulfill the above mentioned criteria, but let's just see where they end up on expiration day.


4 Comments:

Blogger Old Soldier said...

S.O.T.,

Good brief of this high suspect area that affects options traders each month.

Emjoy reading your blog - great work. I know it takes of your time. BTW: XOM has been a great play this week!!!

Regards

9:14 PM  
Blogger Simply Options Trader said...

Hi old solider,
Glad you enjoy it and thanks for your support.

9:20 PM  
Blogger Old Soldier said...

S.O.T.

BTW as for XOM: I Made some really good money off XOM with a straight Long JAN 75 Call this week - 8 contracts - Bought at $2.50 and sold at $4.80.

Regards

9:11 AM  
Blogger Simply Options Trader said...

Congrats on your good trade, old solider. Is this trade any different from COH or AZO? Any learnings from this trade to share? :)

10:09 AM  

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