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Tuesday, February 13, 2007

Bernie's Take On Market This Week

Bernie Schaeffer talked about his outlook for this expiration week in his Monday Morning Outlook. I think it is interesting and educational to share with you the expiration week mechanics.

"Judging by the market's past performance during option expiration week, stocks could be poised to make some gains this week. In columns prior to the January and December expirations, I touched on this trend in the Standard & Poor's Depositary Receipts to post positive results during expiration week.

I think one potential reason for the upside bias in expiration weeks is the unwinding of heavy out-of-the-money puts that accelerates during that week. As these out-of-the-money puts are bought back to capture what little time value is left, those who took the other half of the trade and sold the puts are able to buy back the SPY shares they sold as a hedge against the short put position. This unwinding action in turn helps to add buying pressure to the SPY during expiration week

Since January 2006, the SPY finished only four expiration weeks in negative territory, while the average return during the week comes in at a gain of 0.55 percent..."


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