All day traders should know this, the week leading into options expiration is an extremely tough period to trade. This is a time when the large institutional trading desks will play a lot games with the small retail options traders. Take a look at the major stock indexes during an options expiration week on any intra-day time frame, you will see a pattern that looks like the Wasatch Mountains. The intra-day swings can make any trader sea sick if they did not take a dose of Dramamine before the opening bell.
High probability chart patterns have a tendency of failing during this period as well. On a recent trading session, there was a solid head and shoulders top pattern carved out perfectly on the 10 minute chart. The target for the topping pattern signaled a nice potential $1.50 decline, however, the pattern failed forty minutes after triggering. Another head and shoulder top formed on the intra-day chart signaling a nice $2.00 decline from the trigger to the target. This pattern also failed in just thirty minutes after the trade set up triggered. You see, understanding that it is options expiration week will help experienced day traders realize that nice clean chart setups that usually play out like clockwork can and will usually fail. This is a week of game playing by the institutional trading desks.
Often, when you day trade after the first two hours of the day during options expiration you are essentially swimming with sharks. That’s right, you are swimming with great white sharks. The only difference is that the average day trader does not have a cage (knowledge) around him to protect him from the erratic intra-day swings. Some of the leading stocks that will be most volatile are the large technology stocks such as Apple Inc. (NASDAQ:AAPL), NetFlix Inc. (NASDAQ:NFLX), VMWare Inc. (NYSE:VMW), and Salesforce.com (NYSE:CRM). Just take a look at these stocks this week and you will easily see the volatile action in these names. It is best for day traders to take it slow during the week of options expiration as the action is usually trend-less. The week leading into options expiration is the real shark week for day traders.