I don't know much about options, but can anyone explain to me why expiration days seem to have lower ranges and absolute volatility? I haven't quantified this but that's my impression and I read something about it. Are there figures for biggest option strike. I've heard stories of why this might have some sort of effect on underlying price. Thanks.

Sam Marx answers:

One of the reasons is what is called "pinning" where stocks close to their strike prices will trade around that strike price and get pinned to it. This is not true in all cases but occurs often enough to decreases stock swings.

There have been scholarly studies on this and you can read more about it in the book Trading Options at Expiration by Jeff Augen.

Phil McDonnell adds:

I do not actually know if expirations have lower volatility and reduced ranges or not. But IF it is true it may have something to do with pinning. Pinning has been identified in several academic studies as being a real phenomemon. Basically it involves the stock closing at or on a given nearby strike price which happens to have a large open interest. Essentially the stock gets stuck trading at the round number with greater likelihood than on other days.

Option strategies such as sold straddles, calendar spreads, butterflies all reap their maximum profit at a particular strike. So the incentive could be there for flexionic manipulation. Or it could simply be a product of all the competing cross currents which occur on those days.

Sam Marx replies: 

It has been tested and reported in academic studies.

As a starting point I refer you to Trading Options at Expiration by Jeff Augen.


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