This coming Friday is the monthly options expiration for January. Often, many traders will experience a lot of volatility during the four trading sessions before expiration. These trading sessions will usually be filled with rumors, and countless upgrades and downgrades. Some of the rumors might be true, however, most will not. This is simply just one of the ways that the large institutions can move stocks in their favor.
Why would they do this? It is simple, the large market moving institutions know that most retail options traders are simply buying call and put options on the near term expiration. The retail options trader does this because the options are cheap. You see, the further out the option is in time the more expensive it is for the trader. On the flip side, the closer the option is to the expiration date the cheaper it is. So, the institutional traders will try and figure out the imbalances in the near term expiration and move the equity in the opposite direction of the majority small retail options traders. For example, if there are a lot of call options bought in a particular stock by a large amount of retail traders the large institutions will drive stocks in the opposite direction and make those options expire worthless or out of the money. This type of action happens every month during the third week of the month.
How do the institutions know what the small retail options trader is betting on? Simple, the institutions watch the options chain with sophisticated computer programs and see where the small number of contracts are bought. Large institutions by thousands of contracts at a time, meanwhile the small retail options trader buys between one and twenty contracts. Believe it or not, this is not really difficult for them to do. Once they see a large imbalance in a particular equity they will take that stock in the opposite direction. Just look at how many bullish call options there were when Apple Inc (NASDAQ:AAPL) was trading just over $700.00 a share. Soon after that high print in Apple Inc stock it rolled over by more than 200.0 points to $505.00 a share. It is safe to say that those call options expired worthless.
Rumors will notoriously occur this week. Today, there have been rumors about Apple Inc, Dell Inc (NASDAQ:DELL), and Hewlett-Packard Company (NYSE:HPQ) just to name a few. Some other leading equities that will usually be very volatile during the week of options expiration will be First Solar Inc (NASDAQ:FSLR), Green Mountain Coffee Roasters Inc (NASDAQ:GMCR), and Netflix, Inc (NASDAQ:NFLX).
Trades should also watch for upgrades at highs and downgrades at lows by major banks and brokerage firms. This is another common way that the large institutions can move stocks in the direction that they are betting. Traders should always be on guard this week as options expiration approaches.