The effect of options expiration on index futures

[Laissez Faire]

Can something reliable be said about the price behavior of the stock indices and futures around option expiration day?

I've heard it said that generally, market makers will try to pin the stock market at a price which gives the most favourable outcome for their books.

For ES today, that appears to be in the 4140 - 4150 range which is where we've been stuck for today's session.

Curious to hear if anyone have any interesting comments on the subject.

Thanks in advance.

 

[Laissez Faire]

Also, anything else with regards to how the option market affects or may affect stock index futures would be of interest. Thanks.

 

[CannonTrading_Ilan]

From my observation/opinion:

It seems like the last three option expiration days had very narrow range however I'm not sure that this is the only factor involved I looked at the January one and we had a nice break out of the upside. I am speculating that it's a combination of option expiration lack of major news and Market feeling status quo in regards to the FED inflation and interest rates. It seems like the last 3 weeks we've had very narrow ranges most of the trading days regardless

 

[ETJ]

To the internet! Tons of research on pin risk and why. Pick a flavor.

 

[Laissez Faire]

If we don't get a new high or low by the close this is the 2nd smallest range of the year so far. Looks like the powers that be wants a close around 4150.

 

[mervyn]

Call/put wall. When cash index is nearing a large volume node close to expiration, folks/computers will sell to close the position hence creating a selling pressure to bring the index down, not necessarily crash it. Most of the trades are done by mm. Position holders profits and losses have long been determined and locked in.

 

[NoahA]

Can something reliable be said about the price behavior of the stock indices and futures around option expiration day?

I've heard it said that generally, market makers will try to pin the stock market at a price which gives the most favourable outcome for their books.

I don't know what their books would have shown in the past, but I decided to look up the last 6 months of OpEx to see if there is a pattern to how they traded and made this summary. Included is also the range from high to low beside the date.

Today is the bottom right, and the range behavior does match February well given that is opens, drops, and runs right back up and drops again. But the others show no real pattern. March opens high and finishes lower, but January has a huge rally. November and December are similar to each other, but maybe not as much to the others.

This April is for sure the smallest range at 26pts, but the others are anywhere from 35 to 78 points. So I'm not really sure if there is any pattern to take advantage of here.

I used these charts to show me where the dates were.

 

[Laissez Faire]

So I'm not really sure if there is any pattern to take advantage of here.

Nice research, NoahA.

Of course, the question is what the books were showing at the time for those other days from the past, i.e., where's the largest open interest which would render most options expire worthless for the most favourable outcome for the market makers books? If I read the data correctly the largest open interest for yesterday was in the 4140 - 4150 range.

I imagine there's a cost involved with constraining the market as well and surely MMs can get f''ked, too, so if they need to hedge their books that can move the market out of range as well.

I'm just speculating here and I'm out of my depth as this isn't something I really know much about, but I was hoping some clever option guys could shed some light on the subject.

For now, I think the takeaway for me is that op-ex days should be days where you simply should be aware that there could be some strange behaviors taking place not necessarily relating to price behavior as you see on other days and that the chances are there it will be more constrained and range bound with random spikes up and down.

I have a hunch (and I may be wrong) that yesterday's move higher culminating at 14:15 would have had continuation higher if not for op-ex. Conversely with the pushes down in the morning which both were aggressively bid higher.

 

[NoahA]

Of course, the question is what the books were showing at the time for those other days from the past, i.e., where's the largest open interest which would render most options expire worthless for the most favourable outcome for the market makers books? If I read the data correctly the largest open interest for yesterday was in the 4140 - 4150 range.

Yes, I see exactly what you mean. None of those charts are helpful if we don't know where the largest level was on that day.

But what exactly is the largest level? If its just where most traders are positioned, well, don't more traders lose? If a Money Maker has those clients and their positions lose money, does this mean the MM makes money? So is it better that the level holds or doesn't? And even if this level really is where the big boys need the price to settle, and at multiple firms, surely there are enough people who will make money if it doesn't happen, so there will always be a fight. Sometimes you win and sometimes you don't.

Don't get me wrong, I think having this info could be an edge, but its kind of like when you hear a company releases earnings and they did slightly better. Will this make the stock go up? Who really knows as everyone could be greedy and are unhappy that the out performance is only by a small margin. Plus, maybe the expectations for that quarter were on the low end on purpose. This would ensure a positive number, but other people already know this and hence the earnings beat is still seen as bad and stock drops.

Just thinking out loud here.