Coiling Like a Sidewinder? By Steven Smith Director and Chief Strategist, Options Alerts 5/13/2008 11:17 AM EDT

Stocks are swaying on either side of the unchanged line, but the narrow range seems to belie the increasingly conflicting forces that are swirling below the surface. As mentioned yesterday, the S&P 500 might indeed end up gravitating toward the 1400 line, not surprisingly, the open interest in the strike increased to about 70,000 contracts a side, as Monday's rally made those options at-the-money, which could start to cause some gravitational pull, as investors seem wary of making any large directional plays at this point.

That will leave some of the intraday movements in this week's expiration in the hands of market makers. Their tendency to always be hedging and looking for short-term scalping trades -- especially as expiration approaches, the at-the-money options see their delta approach 1.0 and gamma increases -- means this could create pinning action.

As a reminder, and to answer a question I didn't get to in last week's Option Mailbag, SPX index options cease trading on Thursday's close, but get settled based on Friday's opening price. But it's a "special" opening price, known as the SET, which takes the individual opening prices of all the components.

The value of the SET can be vastly different than the S&P's opening price. Often, it is even outside the daily trading range. This is why the SPX options, even as they no longer trade, will carry a fairly significant premium at Thursday's close.

To learn more about the SET and how it is calculated the on the Chicago Board of Options Trade, at look at this page on their website.

But back to the point that the market seems to be coiling up and getting ready for a decisive move out of what has now become a four-month trading range. There doesn't appear to be any new catalysts, the stories of inflation, credit and lending issues, consumer spending, are all well known. But I'm not ready to buy into the notion that this going to translate into a quiet, low-volatility summer.

I'll have an article up later on some alternative strategies to the "sell in May and go away" idea. Some of us may need to work.

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Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

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