Puts in Place

The game has begun with regards to what, if any, influence this week’s options expiration might have on stock action. Most of the guessing -- and it's just guessing at this point -- surrounds pinning: The tendency of stock prices to gravitate towards a strike price.

While pinning can occur (the forces at work were discussed in Circling the RIM (RIMM), it's not worth trying to identify pin candidates until Thursday afternoon. Anything prior to that is simply throwing darts, and will be as accurate as the underlying probability that a stock has to settle at some price. (Strike prices represent a certain percentage of possibilities.)

But it can be useful to look at the bigger picture -- especially the option interest in index products -- to get a sense of how people are positioned on the broader market.

Will the 900 Line Be Drawn?

It should come as no surprise that the site of peak open interest in the S&P 500 Index and Spyder Trust (SPY) options are the big round number of 900 and $90, respectively. In SPX, the June options have 240,000 and 228,000 puts in place. By contrast, the near-the-money strikes of 920 and 925 have less than 25,000 contracts of either puts or calls at those strike prices. That doesn't represent much buying/selling power relative to the average daily volume of the index futures.

So the first conclusion is that the expiration of SPX options -- which actually cease trading on Thursday, and settle based on Friday’s opening -- won't have much influence unless the index declines by at least 2% in the next 2 days. If that were to occur, we might indeed see a bit of a tug-of-war at the 900 line, which could create some pinning action.

In the Spyder Trust, the June $90 strike has some 145,000 calls and 199,000 puts. Again, these would essentially be offsetting forces in terms of hedging power.