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Expiration Week: A Survival Guide


How not to get blindsided by government, pinned by pin risk.

Well, it's options expiration week again - so it's time to look at where all of the options bets have been placed. Even with the move dramatically higher in equities, we can see from the following chart that there are about 65% more puts outstanding than there are call options (orange is much greater than blue area).

Click to enlarge

The open interest in SPY options is showing that people are quite cautious about the move higher, and are wanting to protect these gains.

With the SPY closing Friday at $85.81, the greatest number of options would expire worthless if the SPY were to fall to $80, which would be a drop of 6.77% this week. Nearly as damaging to option holders would be a fall to $82, which is only a drop of 4.44%. With 5 days of trading, this is all quite possible.

There are important 2 concepts at play during expiration week: The first (and most devious) is the idea that the government likes to intervene in the market during this period because the ensuing panic can have the greatest effect on the market. This seems to be a consistent theme to keep in mind, but one that's hard to predict.

Second, there's pin risk, defined as the chance that the underlying share price will be pulled in the direction of the option strike with the greatest number of contracts outstanding. This is a function of traders having built delta-neutral positions and needing to manage the exposure to risk - either through unwinding the option position, or by adjusting their position in the underlying stock. The potential effects of pin risk grows as you get closer to the moment of expiration, and as the underlying price is close to a strike price that has a lot of option contracts outstanding.

Expiration week is always interesting, so keep your eyes open.

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