Donna,
Not an expert in this area, or indeed any area for that matter but I believe it was McMillan in his first edition of McMillan on options that first brought to my attention the activity of large abitrages and the effect they might have on the index during expiration week but more pertinently and less obviously (to a newbie) on the corresponding options.
Times may well have changed since then (1996) and he may have updated his view in the second edition (haven't read it) but if memory serves, he used to have a strategy specifically based around movement of the index both during opex week and the following week.
I may be suffering from false memory syndrome but the strategy was based around looking at open interest in either SPX or OEX options or better still getting info from a floor broker about the activity of abritrage firms so as to get an idea on whether they were planning on executing large buy or sell programs during opex week, usually Wednesday or Thursday in order to balance their books.
When the futures are trading at extreme premiums or discounts to fair value, the arbitrage folks will step in and sell the more expensive and buy the cheaper using the equivalent options e.g. long synthetic SPX is long SPX call, short SPX put at same strike. Anyway, I won't bother trying to explain it here as it has probably been done much better elsewhere and is a well understood concept.
My point is, and to answer your question, there may very well be an inherent bias in the trading that preceeds option expiration but not neccesarily a bearish one.
Incidentally, McMillans sister strategy was to take the opposite sentiment for the week following opex.
I don't know if these strategies are still viable today but you seem to be well versed in these matters so you probably know better than I.
Momoney.
Not an expert in this area, or indeed any area for that matter but I believe it was McMillan in his first edition of McMillan on options that first brought to my attention the activity of large abitrages and the effect they might have on the index during expiration week but more pertinently and less obviously (to a newbie) on the corresponding options.
Times may well have changed since then (1996) and he may have updated his view in the second edition (haven't read it) but if memory serves, he used to have a strategy specifically based around movement of the index both during opex week and the following week.
I may be suffering from false memory syndrome but the strategy was based around looking at open interest in either SPX or OEX options or better still getting info from a floor broker about the activity of abritrage firms so as to get an idea on whether they were planning on executing large buy or sell programs during opex week, usually Wednesday or Thursday in order to balance their books.
When the futures are trading at extreme premiums or discounts to fair value, the arbitrage folks will step in and sell the more expensive and buy the cheaper using the equivalent options e.g. long synthetic SPX is long SPX call, short SPX put at same strike. Anyway, I won't bother trying to explain it here as it has probably been done much better elsewhere and is a well understood concept.
My point is, and to answer your question, there may very well be an inherent bias in the trading that preceeds option expiration but not neccesarily a bearish one.
Incidentally, McMillans sister strategy was to take the opposite sentiment for the week following opex.
I don't know if these strategies are still viable today but you seem to be well versed in these matters so you probably know better than I.
Momoney.
Quote from DonnaV:
I agree that MM in no way can control/manipulate SET...I guess what I'm trying to say is...IS there an inherent bias in the trading that preceeds options expiration to the down side? More traders hedging positions or basically bearish keeping the spx lower than the underlying suggest it should be? idle thoughts not actionable thoughts
