This was originally published on RealMoney. It is being republished as a bonus for TheStreet.com readers.As Friday's
This plays out on both the put side and the call side. The larger the open interest at the strike, the greater the magnetic pull. Most of this trading is done by market makers using their long gamma inventory as a way to scalp a few dollars on expiration day. Given that market makers tend to trade from a delta-neutral standpoint, in the absence of other outside forces, it's no surprise a stock's price hugs the at-the-money strike price. This leads to the misconception that market makers represent some sort of monolithic front that can move not only stock prices toward the strike price, but have an impact on broad market indices. This explanation expiration of pinning action falls under the totem pole of the many conspiracy theories of trading and is just below some of the gold bugs astrological lunar, as in lunacy, theories. While some manipulation might occur in a very thinly traded stock with a small float, those are the exception rather than the rule. The point is that it depends on how your position is built that defines your needs. And in no case will the physics of market forces be influenced by the few dinghies that MM's can use to catch some sets of waves. Sure, huge open interest can influence trading, as people need to either defend or liquidate positions. But that does not rear its head until about two days prior to expiration. Since market makers tend to be short premium but long gamma they don't need or want anything but more volume which allows them to scalp stock against their option position which will drive prices towards the strike price. Right now the S&P 500 Index is flirting around the 1300 level and depending on how the market closes today might define what type of magnetic force it will exert. I'll try to screen for some individual stocks that have outsized open interest at strikes prices within a 2% of where the underlying shares are trading But honestly, unless you are a very active trader I don't think this a good use of your time or proper way to trade options. This was originally published on RealMoney on August 14, 2008. For more information about subscribing to RealMoney, please click here.