This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Hanging in the Balance Ahead of Expiration

Roiling and Rolling

Watch for large institutions that had established sizable long protective put positions. As I noted in this recent article on option volume , investors have been buying put protection even as stocks rallied over the last two weeks, seemingly in response to the market's failure to take out the July highs by reducing risk.

Some possible adjustments we could see this time include rolling into the October contracts or simply unwinding existing positions by selling out long holdings and their related hedges. The hedges most likely take two forms: covered calls, in which call options are sold short against the underlying security, or married puts, in which puts are purchased as insurance against the long holdings. In either case, the unwinding of positions would create moderate downward bias and tend to put pressure on option premiums, as the desire to reduce exposure drives prices toward a short-term price equilibrium.

The Pinning Dynamic

The dynamics that can make stocks gravitate toward strike prices, creating support and resistance levels, or the phenomenon known as "pinning," work as follows. Imagine I bought 500 shares of XYZ stock at $16 and I'm short five $17.50 calls. The stock is currently trading at $16.50. For now, I don't need to do anything except hope the XYZ shares rally to $17.50.

Assuming the stock does rise, I could close the position by selling the stock (which creates downward pressure) and buying to cover my short calls. The calls I buy are sold by someone else, who now in turn is short the XYZ calls. They might in turn buy shares of XYZ to offset their short calls (creating upward pressure). The result is to drive the underlying shares of XYZ toward the $17.50 strike.

If the stock goes through $17.50, the people who are long calls at that strike will start selling stock against the calls. Again, that pressures the stock back down toward the $17.50 strike. In issues with large open interest, this battle plays out on both the put side and the call side. While it's hard to make predictions, it's a good idea to be aware of which strikes have the largest open interest, because they can act as magnets.

Pinning Candidates

Here are some stocks that are trading near strikes that still have a high level of September option open interest. Valero (VLO - Get Report) is currently trading around $111 per share, and the $110 strike has 12,000 calls and 9,000 put contracts still open. After getting slammed Wednesday Best Buy (BBY) might find some support at the $45 level, as there are over 11,000 puts still open but just 3,000 call contracts at the $45 strike. Dell (DELL - Get Report) always seems to pop as a pin candidate; this time it's the $35 strike, which has 31,000 calls and 29,000 puts open, that could keep the stock hovering at the current price.

Steven Smith writes regularly for 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.

2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,672.60 -141.38 -0.79%
S&P 500 2,051.82 -11.33 -0.55%
NASDAQ 4,757.8790 +7.4820 0.16%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs