Options Expiration Can Cause Some Trouble, Even From the Back Seat

The market's twists and turns are overshadowing expiration but the play can't be ignored.
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Although the market tumult of the past week may make Thursday's April options expiration impact seem muted, traders said caution is still necessary.

Money manager Dave Schultz of

Summit Capital Holdings

said there could be "some positive expiration pressure if we start to drift up from here." He said if the

S&P 100

, called the OEX, heads toward 800, people will be buying. If people own OEX puts around that strike price, they'll have to get out of the puts, while if someone owns calls, they'll start exercising those, with those factors causing the market to go up further.

The OEX was down 2.40 to 783.52 at midday.

Schultz said one thing to look for Thursday is S&P 100 stocks to be "pegged" (a stock is pegged, or pinned, when it gathers around the strike price). These include names such as

General Electric

(GE) - Get Report

,

Microsoft

(MSFT) - Get Report

, and

IBM

(IBM) - Get Report

.

With the

Nasdaq's

downdraft apparently at least on hold this week, Schultz said selling May 80 Microsoft puts were "not a bad deal" at a premium of 5 ($500) late in the morning. An investor would sell a put option for the premium, betting that in May, Microsoft will be trading higher than 80, leaving the put-option writer to keep the premium collected for selling the put, which would expire worthless.

Some index options expire Wednesday, while equity options expire Thursday ahead of Good Friday, when the markets will be closed. Some index options also expire tomorrow, including the S&P 100 and the

S&P 500

. However,

Nasdaq 100

index options expire Wednesday.

One trade idea that hasn't turned out well for some in the market lately was writing puts against names like

JDS Uniphase

(JDSU)

and

Inktomi

(INKT)

, noted Schultz.

Despite the market's broad recovery, investors who wrote puts are still underwater, he said. Selling put options is generally a bullish bet, whereby the writer of the put option collects the premium for selling the contract on the hope that the put option isn't exercised.

Larry McMillan of

McMillan Analysis

in Morristown, N.J., said he didn't see expiration being very influential this month. McMillan noted that some of the open interest in April in-the-money puts were exercised last Friday. However, he also pointed out that "there wasn't much open interest period."

McMillan said the options market wasn't giving any clues as to future activity. He said there weren't any takeover rumors and that action in options wasn't being predictive for companies earnings-wise.

Overall in the market, Scott Fullman, chief options strategist at

Swiss American Securities

, pointed out that since 1995, in the 21 times that the market was down in the three weeks before expiration, 17 times it rallied the week of expiration.

The strategist said the question for the market right now is where the market goes next week. "That's really what everyone should be concentrating on."