Options Expiration: Three Things You Need to Know

Fischer said, "The Fed changed the game overnight, and any traders who were short 4% out-of-the-money (1250 strike) upside index calls lost almost $3,000 for every 1 lot when S&P futures opened sky-high on Friday morning. The lesson learned from this is that the current financial crisis has globalized the volatility landscape -- lots of people in lots of different countries are talking about adding cash, changing rules, debating the locate requirement for market-makers, etc.

"What happens during the overnight hours in Asia and Europe can significantly affect our opening. Based on the activity last month, I would expect many traders to close out all their short positions on Thursday. They do not want to go short into Friday anywhere near the closing strike price. In times of extreme volatility, the opening price of a.m.-settled options can be significantly different from the price at the close of trading. And short-players are essentially naked during that period of time."

2. "See Where the Bodies Lie"

Michael K. McCarty, chief options strategist at Meridian Equity Partners in New York City says huge accumulations of put open interest in this contract cycle suggest that despite a blowout rally for stocks at the launch of this expiration week, pressure may lay to the downside as expiration day approaches.

"For a long time, we had an upward bias into contract expiration because the perception was that a generally rising market resulted in a lot of calls landing in the money, thus creating upward bias heading into the closing of expiration. This time around there's a lot of in-the-money puts. If the same holds true, we could see a negative bias going into expiration."

For corroboration of this, McCarty says he's looking "where the bodies lie" -- namely the open-interest accumulations, the strikes at which index cash levels tend to gravitate in connection with expiration.