Options Expiration

[whatamidoing]

Hi everyone,

I've been watching/listening to Cramers shows for a little while and he'll say somethinig like "that stock is stuck at that price because of options expiration." I understand what an options contract is and that they expire after the 3rd friday etc... but what does an options expiration have to do with the price of the stock? I always thought it was the stock price that dictated the options.

thanks

[deepinwonder]

I only buy and sell stocks and am wondering how options expirations affect prices. Any info on this would be appreciated, thanks!

[whatamidoing]

I was just listening to Cramer's radio show and he said (something to the effect of) "AAPL is trapped below $65 because of the $65 strike that expires this week. By the next options expiration, AAPL will trade at $75"

There are strike prices all over the place, why isn't the price locked at $50 (or some other arbitrary strike price)? even if i was holding a Nov 65 call (which I'm not), how does that affect what price AAPL trades at TODAY??

I know there are people who are knowledgable, as well as options traders here. thanks for any help.

[John Paul Sanborn]

My take is that the big holders freeze trading when they near a strike and expect more forward momentum.

They do not want to have to give away several dollars a share, so if it holds below the strike till expiration then they can start selling again.

They've sold 100 contracts, but have another 10000 units in the protfolio...

[optimus25]

Depending on the option call or put:

People use options to leverage a stock position, placing bets that the stock will rise above the strike price (call) or below (put). I can see how a stock won't move above a strike price at the expiration date. Remember, at the expiration date you either hold the option worthless if the stock is below the strike price on calls or you can exercise the option. Exercising options would cause the person who sold you the option to sell you the stock at the current price, preferably above the strike, but in most cases they normally expire worthless.

Now I'm completely lost. Maybe its a psychological thing with the strike prices. I'll have to do more research...options are one of the hardest sections on the Series 7 Exam.

[deepinwonder]

I'll have to study this more, too. It's very confusing.

[John Paul Sanborn]

Assume it's a stock that is not heavily traded say 300k daily averave volume.

People who write calls have a lot of the stock, they don't write contracts on all of thier holdings. So they hold the stock when it is near the strike so that it will not go over.

This is one of a number of reasonswhy many who play options say to stay away from any stock with a daily average less then 500k. Single players can skew the results too much.

[vthokienj]

If these people hold onto their stock, wouldn't decreasing the number of shares available for sale only drive the price up?

[aj14]

When you buy a put or call, you are buying it from an account (institution/hedge fund/broker, etc.) or a specialist. They are selling it to you for a variety of reasons, but mostly they expect it will expire worthless (options are a "wasting" asset affected by time, volatitlity, and interest rates).

When expiration time nears, the sellers of the options want to ensure that the underlying stock stays in a narrow range so that the premium which they collected from you stays in their pocket, rather than having to go into the market and buy the option or the stock at a price which costs them more than the premium which you paid to them. In order to ensure this happens, the sellers of options try hard by buying or selling the underlying shares sufficient to ensure that the price stays around the strike price of your option.

This is a very professional (and profitable) game played by very large firms such as Goldman Sachs, Bear Stearns and Morgan Stanley. It involves billions of dollars, so a few million to move a stock is peanuts compared to what they make.

[deepinwonder]

Shifty brokers. :evil:

Options and short selling leave too many openings and reasons to manipulate stock prices, at the expense of individual investors and hard working employees of those companies. If you can't afford to buy and sell a stock, then you shouldn't be in the market, anyway. I think that should be illegal and, until it is, politicians will never convince people that investing is some kind of viable alternative to Social Security, not that I'm big on SS.