The Wednesday before options expiration is usually the most volatile trading session of the week. Very often major events, rumors, and even political announcements will occur during this highly volatile trading week. Today, we heard the news about two Iranian warships sailing into the Suez Canal. This news caused quite a stir in the markets as the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) declined lower by 0.50 cents in less than ten minutes this afternoon. Since that time the major indexes have rallied higher on the typical light volume trading action that we are used to seeing.
During this entire week leading up to options expiration, which is always the third Friday of the month, we see very volatile moves in many of the popular stocks. For example, today Deere & Co. (NYSE:DE) sold off sharply intra-day after starting the morning sharply higher at the open. These are the typical moves that traders can expect during this week.
The week is a time for institutional game playing. Once options expiration is over most stocks and indexes will go back to trading in their normal ebb and flow. Please remember that most small retail options traders will never actually exercise the options that they hold. They will usually try and settle them long before Friday’s expiration for a premium gained or lost. Most of these small retail options traders simply do not have the cash to buy or sell stocks and options are simply a cheaper way for them to play the market. Remember the institutional traders know this and they will take advantage of this options expiration week every month. Always respect the power of the killer whale (institutional trader). You don’t want to be the seal (small retail options trader) that swallowed up this week.