Cramer on the Lingering After-Effects of Expirations

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By James Cramer

Friday expiration doesn't just go away without lasting impact. When we come in Monday after a big expiration like last Friday, the after-effects of the brutal, option-led decline stay with us for at least a couple of hours, both artificially boosting and depressing share prices.

It's called "option hangover," and anybody who trades for a living is familiar with it.



. On Friday IBM took it on the chin for three points, plunging all the way from 173 to 170. That's a couple percent loss off the common. But it was a monster decline if you were long the May 170 calls, which were worth 4 going into the session.

More important, the people who speculate in calls tend not to have a ton of capital. Most of the people who owned that call had to either sell it for virtually nothing (a teeny) at the bell or exercise it and hope that IBM has a decent opening. That way you could sell the common Monday and, hopefully, recoup some of the investment.

Unfortunately, most exercisers of that call couldn't afford the capital to buy the shares outright. So when the stock started going south these freeloaders had to dump their shares.

The decline fed on itself until IBM became the leading point decliner in the

Dow Jones Industrial Average

, even though nothing fundamental had occurred. Once these weak holders bolted, however, the stock righted itself and came roaring back until knocked down by a tech sell program in the last 15 minutes of the day. Why does this happen? I can tell you as a broker who sold tons of options, my clients typically hated to take the loss on Friday. They loved the "free" ticket to Monday's session. Most of them in this case would have judged that IBM's decline on Friday was false and they were willing to pay to see if the stock rallied back to where it was before expiration.

But by ten o'clock I would have been after them to put up the capital that they needed to take delivery of the stock. Typically they would stall, but by 11:00 they would face the music and blow the stock out.

That's the hangover effect.

It's also one of the reasons why I rarely trade in the first two hours after an expiration. I want stocks to work off the artificiality, the games, so to speak, of Friday's expiration. Sure, I will look for bargains, stocks that are forced down by margin selling or stocks that got "pinned" by the strike and therefore are ready to rally (more on that next expiration). But most important, I just don't take what happens the few hours after expiration seriously.

Just like in humans, hangovers don't produce rational thinking. I let things settle before I make any big bets on what the real market will look like¿


Random musings: When I was a sports reporter I was always revolted by the "pre." That's the story before the game that the editors would make me churn out that would predict what would happen in that day's game. As the whole point of the game is that we don't know what the outcome will be, I always felt these stories were exercises in futility.


meetings are even worse.

At least in a sports pre, a coach or player would help you make a few predictions. But it's not like I can call

Janet Yellen

and say, "Janet, how does it look today? Who you going with? Are you worried? Will it be a tough match?" Unfortunately, other editors don't agree with me, hence the massive -- and futile -- focus on what the Fed will do by both print and television¿

You can tell there isn't much news when GM's international plans dominate the front page of the


two days straight¿For someone who has studiously avoided gold stocks these last 15 years, the unraveling of this second mine is proof positive of the need to stick with the precious metal itself as a way to play gold, and not the stocks of the producers.

James Cramer is manager of a hedge fund and co-chairman of The Street. His fund holds a long position in IBM. While he cannot provide investment advice or recommendations, he welcomes your feedback, emailed to or