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inthemoneystock (< 20)

Options Expiration Whipsaw

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January 20, 2011 – Comments (3)

Tomorrow is options expiration and if you watched the action in the market this week it is nothing short of wild and volatile. This is the one week of the month when institutional money will shake the markets both ways in order to shake out the small retail options trader. Look at the action in stocks such as Apple Inc.(NASDAQ:AAPL), Netflix Inc.(NASDAQ:NFLX), and F5 Networks Inc.(NASDAQ:NFLX) this week. These stocks have been all over the map this week trading in choppy fashion, and sometimes making violent swings in both directions. 

Many investors will say that this action in the market is due to corporate earnings and that certainly is partially true. However, if you have followed us over the years you will have noticed that this type of action that we are seeing this week occurs every month during options week. Just look at the intra-day swings today and any trader will have to admit the action is down right violent. It is important to remember that most retail options traders play options because they do not have the capital to actually purchase the stock. Therefore, these options traders usually look to settle their options before the actual expiration date for a premium gain or loss.

This is a week to trade only the best chart setups and protect profits when you get them with a stop in the money or at break even. This is not the week to get cute and look for the home run trade. Money management is essential during this week when trading the market. 



Nicholas Santiago
IntheMoneyStocks.com

3 Comments – Post Your Own

#1) On January 20, 2011 at 5:18 PM, davejh23 (< 20) wrote:

"However, if you have followed us over the years you will have noticed that this type of action that we are seeing this week occurs every month during options week."

Looking back, I don't see a real clear consistent spike in volatility during options expiration weeks.  I see many weeks where the current trend simply continued...often with little volatility at all.  Do you have long-term stats on this? 

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#2) On January 21, 2011 at 7:15 AM, guiron (21.82) wrote:

I would expect an option expiration Friday during earnings season would be pretty volatile.

That said, we've had two down days in a row, and although we came back yesterday it was brutal for most of the day. Volatility is up this week after three weeks of gains in the S&P, and at the close yesterday the most of the day's losses were pared as the trend reversed earlier in the day, which I think will follow through to today. IMO we're due for a relief rally day, at the least. GE reported earlier this morning and beat, and futures are looking very good since then ... I think this week is just a flag, and next week we'll confirm the bull trend again.

Of course, if the market sells off right at the open today, it probably won't be able to recover until Monday at the earliest.

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#3) On January 21, 2011 at 8:22 AM, hmhn511 (< 20) wrote:

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