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Whipsaw Wednesday Underway



October 19, 2011 – Comments (0) | RELATED TICKERS: GS , VMW , NFLX

The Wednesday before options expiration is usually one of the most volatile trading sessions of the month. As you may know, options expiration occurs on the third Friday of every month. During the trading week leading into options expiration there will usually be a lot of rumors and erratic price movements in many of the leading stocks. Just look at the false report by The Guardian newspaper yesterday as they said that there would be a €2 trillion European bank bailout. Later, reports were released by more reliable sources such as the German government that there would not be a bailout of that size. In other words, expect the unexpected during this trading week.

Often, during the week of options expiration the large institutions will take stocks the opposite way from the popular strike prices. For example, almost every small retail investor was betting that Apple Inc (NASDAQ:AAPL) would soar after earnings, however, the stock is declining sharply this morning. We can only guess how many retail options traders owned calls at the 450 strike price on Apple, now those options will expire worthless. It is important to note that most retail options traders will usually look to close out their options positions for a gain or loss before expiration. These traders are simply looking to capture a gain in the premium paid as most retail options traders really don't have the cash to buy the stock. Rarely will the small retail options trader ever exercise the option. The institutions know this and that is why they can play these games each and every month.

As you probably know, corporate earnings season is underway. When you combine earnings with options expiration it will usually make for an exceptionally volatile trading week. Traders and investors must be on their toes and really expect sudden moves in many of the leading stocks this week. Some of the stocks that will see the most volatility before options expiration are Apple Inc (NASDA:APPL), Goldman Sachs Group Inc (NYSE:GS), Netflix Inc (NASDAQ:NFLX), Google Inc (NASDA:GOOG), and Inc (NASDA:AMZN).

Nicholas Santiago

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