Expiration day can have a strong effect on a stock. This is known as “pinning the stock”. A stock that is stuck at strike on expiration day when the general market is moving will move away from strike after expiration day. Stocks with high open interest at a particular strike usually get pinned near the strike on expiration day. This occurs because both the put and call holders (both long and short options) fight back and forth. In the end nobody ends up winning and the stock ends near the strike.
The question is how does one profit from the pin? The likelihood the stock moves away the day after expiration is high. The extra weight due to expiration is lifted. Let’s take two stocks from last months (August) expiration. AAPL was stuck near the strike while other tech stocks were higher. The stock basically sat on the 250 strike during expiration day. The whole days range happened the first hour. Then on Monday the stock tried to play catch-up and gapped to the $251 level and spiked to $252 which was support the day before expiration. After the pop the stock sank right thru the 250 strike and trended lower the rest of the day.
The chart below of DE is similar to AAPL. The stock closed the day before expiration day a bit above the 65 strike ($65.71). It spent most of the day above the strike and couldn’t mount any downside below $65. The next day after all the options went away the stock broke $65 and kept dropping the rest of the day. Notice the volatility on expiration day in DE was very low.
So what can we take away with the effect of expiration day on a stock’s movement the following Monday? We know the “pin effect “is now lifted giving the chance of a move through the strike price which didn’t happen on Friday a higher likelihood. Not all stocks are affected by the strike price on expiration day. The two examples above it was very clear what expiration day had on their movement both on and after that Friday.
A daily stock trader can use expiration day to their benefit. In the case of DE stay long the stock at $65.10 with a stop below 64.80. The stock was trending down the day before expiration but the 65 strike became a floor. If the stock would have blown through $65 early on expiration day then shorting the stock and using $65.20 would be recommended.
What stocks are best for using this technique? There are three main ingredients- open interest at strike, daily volume at strike and the stocks average daily volume. Don’t forget on expiration day the volume will be distorted. Part of the reason of higher volume is all the option volume creating stock volume near the strike.
GOOG is a good example of how the option volume on expiration day and open interest can force the stock to strike. It’s amazing how a $500 stock can get pinned so many times over the years. The main reason is daily volume is 2-4 million but option volume at a certain strike creates twice or three times the normal volume leaving a pin a likely scenario.
Trading on the floor so much money has been left on the table from getting pinned on expiration day only to have the stock blow through the strike the following week. Use expiration day for trading stocks which are near strike and use the following Monday to trade the same stocks like the strike price never existed and in the long run this will make for a better trader.
