Ready or not, today is expiration day for May options. But there don't appear to be any big positions that are too well-hidden or closer than we think that will suddenly be revealed or have moved into-the-money, so I don't expect this expiration to cause any major price swings.
First, you have to remember that index options -- the area that can have the greatest and broadest impact on the overall market in terms of program trading -- actually ceased trading yesterday and were settled on today's opening. So the options on the S&P indices, both the
(SPX 500) and 100 (OEX100) are done.
But it still may be worth keeping an eye on some ETF option-open interest, which trade and settle on the close today, just like common equities. As I mentioned last week and expanded on in
this article, the
Nasdaq 100 Trust
$34 put had seen its open interest double to some 660,000 contracts (and is still around that level as of this morning). Therefore, it might offer a level of support heading into the expiration.
This leads to a somewhat belated, and surely tangentially related, response regarding Scott Rothbort's post in
yesterday in which he postulated that some of the market gyrations were being exacerbated by the fact that Exchange Traded Funds are not bound by the uptick rule, and therefore large players were buying puts and were able to pummel the market, causing price dislocation.
I think exactly the opposite is true. The fact that ETFs are not bound by uptick rules means there is no need to create a married put situation to skirt the uptick rule.
This trading tactic came under fire last year, as regulators felt it (sometimes known as bullets) was being used by short-term traders to manipulate low-cap, illiquid stocks. (Here are just
two of the several pieces that were posted on the subject at the time.)
While the married puts, or "bullets," might have been capable of pushing a single and thinly traded $5 stock down 10% to 15% in one day, I just don't think that's possible in the ETFs -- especially the QQQs. The size of the market is simply too large (with about 100 million shares) and has too many sophisticated players for the QQQ price to get too far out of line before arbitrage (remember, the QQQs represent a basket of stocks) or program trades kick in and bring it back toward "fair value."
This would be the case even in less liquid or lighter-volume iShares or HOLDRs, in which the true value of the underlying basket of stocks would prevent the ETF from trading too far out of whack or being easily manipulated.
I think trading curbs do a sufficient job preventing a raid or panic from letting the market snowball out of control. In fact, surprisingly, the
Securities and Exchange Commission
seems to agree that fewer rules and regulations create a market that, if not orderly, is at least a fair price discovery system. To that end, it has been rolling out a pilot program regarding
removing the uptick rule last December.
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 invites you to send your feedback to