Jim Cramer warned Monday on his TheStreet.com TV video, "Strike-Price Strikeout" against getting involved in stocks that are too close to their strike price.
A stock's strike price is the price at which the holder of a stock option may buy the stock. If the strike price is below the price at which the stock is trading on the open market, the option holder could turn a profit a profit; if the stock price on the open market is below the strike price, the options are "underwater."
When options are about to expire -- as they do on the third Friday of every month -- a strange phenomenon starts to occur. As traders give up on or become more desperate about their options' prospects, they take actions that affect the stock's price. What you need to know is that as options expiration looms, these forces can cause stocks to trade "artificially" at a popular strike price; the effect will lift as soon as expiration is past. But the temporary effect can be confusing and worrisome if you're not in the know.
Cramer advised in "Strike Price Strikeouts" that special attention be paid to stocks like these because it is option expiration week. He spoke negatively of
American International Group
, which he owns for his charitable trust,
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"Now that's a stock that has always found its level of a round number because of option pinning," Cramer said. "I don't think it should be up a dollar; I think it could give it back."
He also mentioned
as stocks that are currently trapped by strikes.
an example of a stock that's in a "free-fire zone." Cramer said he believes the stock, currently at $73, could go to $75 by week's end.
"I think that when you have a stock that's $3 or more above a strike, I want to look for that stock to go to the higher strike," Cramer said.
Cramer added that when you have a stock right around the strike like
, another stock he owns his charitable trust,
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"When I see a lot of stocks inching up, it makes me wonder that we're not going to have one down day this week that's going to take away those gains," he said.
Cramer said he would not speculate or even invest this week in stocks that are a dollar or two above their strike. He noted that once a stock reaches $3 and above, he is willing to take the risk.
On the fundamentals side, Cramer said
has already been "beaten up by the Lehman downgrade." He predicted the initial reaction to
will be negative, but then it will come up over time, as has been the pattern.
In addition, he listed
, which he also owns his charitable trust,
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as stocks that could all come in on profit taking.
Bank of America
, Cramer is not ruling out the
bid, and he said unless the top guys at
leave, the stock is going to come down $1.50.
At the time of publication, Cramer was long AIG, Altria Group and Goldman Sachs. General Electric owns CNBC, for which Cramer is a featured commentator.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for
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