Cramer's TheStreet.com TV Recap: Option Expiration Playbook

Jim Cramer warned Monday on his TheStreet.com TV video, "Strike-Price Strikeout" against getting involved in stocks that are too close to their strike price.

A stock's strike price is the price at which the holder of a stock option may buy the stock. If the strike price is below the price at which the stock is trading on the open market, the option holder could turn a profit a profit; if the stock price on the open market is below the strike price, the options are "underwater."

When options are about to expire -- as they do on the third Friday of every month -- a strange phenomenon starts to occur. As traders give up on or become more desperate about their options' prospects, they take actions that affect the stock's price. What you need to know is that as options expiration looms, these forces can cause stocks to trade "artificially" at a popular strike price; the effect will lift as soon as expiration is past. But the temporary effect can be confusing and worrisome if you're not in the know.

Cramer advised in "Strike Price Strikeouts" that special attention be paid to stocks like these because it is option expiration week. He spoke negatively of American International Group (AIG Quote - Cramer on AIG - Stock Picks), which he owns for his charitable trust, Action Alerts PLUS.

"Now that's a stock that has always found its level of a round number because of option pinning," Cramer said. "I don't think it should be up a dollar; I think it could give it back."

He also mentioned Cisco (CSCO Quote - Cramer on CSCO - Stock Picks), General Electric (GE Quote - Cramer on GE - Stock Picks) and Exxon Mobil (XOM Quote - Cramer on XOM - Stock Picks) as stocks that are currently trapped by strikes.

He called Chevron (CVX Quote - Cramer on CVX - Stock Picks) an example of a stock that's in a "free-fire zone." Cramer said he believes the stock, currently at $73, could go to $75 by week's end.

"I think that when you have a stock that's $3 or more above a strike, I want to look for that stock to go to the higher strike," Cramer said.

Cramer added that when you have a stock right around the strike like Altria (MO Quote - Cramer on MO - Stock Picks), another stock he owns his charitable trust, Action Alerts PLUS, he believes it will not go anywhere.

"When I see a lot of stocks inching up, it makes me wonder that we're not going to have one down day this week that's going to take away those gains," he said.

Cramer said he would not speculate or even invest this week in stocks that are a dollar or two above their strike. He noted that once a stock reaches $3 and above, he is willing to take the risk.

On the fundamentals side, Cramer said Oracle (ORCL Quote - Cramer on ORCL - Stock Picks) has already been "beaten up by the Lehman downgrade." He predicted the initial reaction to Best Buy (BBY Quote - Cramer on BBY - Stock Picks) will be negative, but then it will come up over time, as has been the pattern.

In addition, he listed Goldman Sachs (GS Quote - Cramer on GS - Stock Picks), which he also owns his charitable trust, Action Alerts PLUS, Lehman Brothers (LEH Quote - Cramer on LEH - Stock Picks) and Bear Stearns (BSC Quote - Cramer on BSC - Stock Picks) as stocks that could all come in on profit taking.

As per Bank of America (BAC Quote - Cramer on BAC - Stock Picks), Cramer is not ruling out the Barclays' (BCS Quote - Cramer on BCS - Stock Picks) bid, and he said unless the top guys at Citigroup (C Quote - Cramer on C - Stock Picks) leave, the stock is going to come down $1.50.