This article was originally published March 18, 2000.

Most of the time, options don't matter. Most of the time they exist in their own world. But in expiration week, they matter plenty, which is why I dwell on them.

So, why do they become the tail that wags the dog during expiration week? What makes them so powerful?

First, the only reason I even know this stuff is because I used to do nothing but trade options when I didn't have much money. I took all the money I had saved up for law school and rolled it into options and made a ton of money that I then used to pay my tuition. I got started early on in the game because I loved the leverage and excitement. It is because of years of trading that I now know things like when a squeeze might occur or where a pitched battle might take place.

So many of you write in and ask, "Is there a place in

The Wall Street Journal

where I can read about the potential squeezes?" Or, "Does


know when the squeezes are going to occur?" Absolutely not! I have never read about any of this stuff in any magazine or newspaper because it is all intuitive and derived from my experience, not because there is some printed list somewhere.

The reason why I know this stuff is because I have learned a critical lesson that I keep enforcing: Options are a zero-sum game. There is a winner and a loser. When you buy a call, there is someone who sells it to you. Sometimes that person is long common stock and wants to pick up income by selling a call.

Sometimes that person is long a call and sells it to you. But often the call is sold by someone who is betting against you. Those who sell calls because they want them to go down are in a pitched battle all week with those who want the calls to go up. And the battle has a conclusion, a bona fide ending that makes the battle get more heated all week.

There are winners and there are losers. There are people who are trying to stop you from making money and there are people who are trying to make money. There are people trying to tag you out, people playing defense. They need to stop you.

Why do they need to stop you? Probably because they are trying to make it up in volume. Let me explain. The people who sell calls for five-eighths of a dollar and three-quarters of a dollar don't make much on each one. But if you sell thousands of them and they go out worthless, you have quite a payday.

Again, you are someone who specializes in selling calls. One of your specialties is that you trade calls on

National Gift Wrap

, a boring cyclical that hasn't done anything in ages. The stock has been stuck in a range between $25 and $28 all year, and is down substantially from its high. You have been selling calls regularly against this stock because the calls always go out worthless because the stock's been a dog. As you are typically selling a couple of thousand calls each month, and they are all going out worthless, you have been picking up

mucho dinero

each expiration day. Sometimes, when the stock runs up to its upper end of the range, you think, hmm, maybe it is going to break out, but you see that people are willing to pay really juicy premium for the calls and you sell them. Then the stock recedes and you collect the gains when the calls go out worthless.

This week, on Monday, a broker comes to you and says he has a client who wants to buy 1,000 National Gift March 30 calls with National Gift at $25. You are naturally suspicious because that is an awful lot of calls to buy knowing that a.) they will expire at the end of the week, b.) the stock hasn't gotten above $28 and c.) no news is expected. (It isn't due to report.)

You know that National Gift might be taken over -- anything can be taken over -- but you don't know whether it is happening and you figure that nobody would be dumb enough to buy 1,000 March 30 calls with five days left if there were a bid because that guy will get nabbed by the regulators. (And believe me, you would.)

So you offer the March 30 calls for a buck, 1,000 times. That means, you are offering the buyer the right to buy 100,000 shares of National Gift at $30 for $100,000. With the stock at $25, that seems like a pretty stupid bet to make. The guy, who is not dumb, bids you three-quarters for them. These markets are negotiable. You hold firm. You want to make $100,000 this week and you aren't going to sell them for less. The prospective buyer passes, as they are too rich for him.

But I, Jim Cramer, hear about your offering from a broker. I don't know anything about National Gift, but I think the cyclicals are due for a rally. This offering seems like an interesting speculation, or spec. I am looking for upside insurance against a big blowoff in the traditional stocks. I am thinking that the


is too oversold and the


is too overbought.

I am willing to take the gamble that this is the week that cyclicals go up, the


explodes and I make some money in the Old Economy. I "take," or "lift," your offering. In other words, I buy the 1,000 calls on National Gift, with a week left. I love upside insurance -- this is a "punt," as we call it -- and I want to give it a try. I am thinking the most I lose is $100,000, and when you are running $365 million, that's not too much to pay for an insurance policy against an upside blowoff, even if it goes out worthless in five days. Stranger things have happened.

The next day there is a seismic shift in the market. The paper stocks explode up along with the chemicals and basic industry stocks. Maybe somebody thinks the


is done tightening. Maybe these stocks got too cheap. Maybe some price increase is sticking. National Gift jumps $2. The call seller is still oblivious. He is thinking this stock is so far from the $30 strike, that he has nothing to fear. If he wanted to, he could always buy 100,000 shares of National Gift to protect himself. But that's a lot of capital he would have to expend. He could borrow the money and put the trade on but his risk reward is not so good. If National Gift drops $2 back, he will have made $100,000 on the call but lost $200,000 on the common. If it drops three or four bucks, it is an even bigger nightmare. Plus there is the nagging cost of carry. Most of the people who sell calls don't want to borrow money to finance common stocks underneath.

He could buy them back, of course, and take a loss. He could find some firm, some brokerage, that would sell him 1,000 calls, but he might have to pay a buck and a quarter, or $125,000, for them, which is a huge loss. So he does nothing.

Wednesday the whole world changes. Real buyers come in to buy the paper stocks again. In the meantime, National Gift, which has an aggressive buyback, steps up and begins to buy back stock right under the buyers. The stock is at $28 in the morning, up a dollar, and the company is bidding $28 for 300,000 shares. The stock only trades a couple of million shares a day, so the company is a good percentage of the volume.

Making matters worse, National Gift is in the S&P 500. There are lots of people who have sold calls against the S&P 500 future (


) and they are being squeezed as the index climbs higher. They keep coming in to buy the calls back forcing the index up ever more. And new money is at last pouring in to buy these Old Economy stocks.

Midday, Bob Pisani flags National Gift as a stock that at last is gaining traction. It jumps another $1.

It's Wednesday at 2 p.m. and National Gift has broken out of the range. You are beginning to think, hmmm, I could be in a spot of trouble on those calls. Two days till expiration and this stock is breaking out.

But still you do nothing, because the calls, with two days left, are still where you sold them to me. What are the odds that this move continues?

At 3 p.m. you get a preliminary view from your brokers about how expiration may turn out. It looks better to buy. National Gift inches up further, to $29.50. You check to see where you could buy the calls back and they are at $1.50 now! They are really pumped. You would lose $50,000 and you don't even know if someone is willing to sell you all 100,000 there.

You do nothing. You gamble that this move can't be sustained. It would be a once-in-a lifetime move. If we could analogize to insurance, this would be the Johnstown Flood for you. Once in a thousand years. You just don't think it is possible. You don't want to hedge against it. You let the short call position ride.

On Thursday, the market simply explodes. The Dow goes up 500 points. Paper stocks are just the rage. Three firms recommend National Gift and it opens up 3 points to $32.75. You are now short a call for $1 that is at $3 and change with one day left. You are down $200,000 on this trade (you picked up $100,000 but now you have to buy them back at $3 and change if you want to, so $300,000 minus $100,000 that you picked up equals $200,000.)

You can't really handle that big a loss and you are beside yourself. You go into buy the common stock to hedge, and next thing you know, there are four other buyers and the company has stepped up its buyback even more.

You check the option market and it is the same as the common. You panic, just panic, and you say to your broker, "Pay anything, anything, for 100,000 shares." You buy the stock at $37.

The pressure is now off. But you just lost $600,000 and you are out of business. All because you tried to make that $100,000 with a week left. You were part of a giant squeeze and you contributed mightily to it. This pitched battle happened millions upon millions of times. It explains how options contribute to the run-up.

That's why expiration plays such a big role -- because these trades all had to end in one week. The seller of the calls couldn't wait any longer. His number was up. He capitulated because he could not come in short 100,000 shares of National Gift on Monday.

Game over. Call-buyer wins, call-seller loses and the stock goes higher!

James J. Cramer is a director and co-founder of He contributes daily market commentary for's sites and serves as an adviser to the company's CEO. Outside contributing columnists for and, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made.

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