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This article does not directly teach you how to trade during options expiration, but informs you why you should know what effect it has on stock price.
Whether you trade options or not, it can save you a lot of money and headache to know how their expiration can influence the stock prices. See options expiration calendar.
Basically options trading involves the buying and selling of contracts where the both parties are betting on a certain security to either reach or not reach a specific price, and roughly once a month there is a period of when contracts expire. Expirations can augment the normal trend and volume pattern and leave your normal analysis seeming offset.
Many believe that certain stock prices are effected on expiration day because many “losers” in the deal are either trying to get the stock price to where they need it to be or trying to offset any losses by buying up shares.
A good rule of thumb is that the week before options expiration is most likely to be bullish and the week after options expiration is most likely to be bearish. On average, options expiration week is less volatile and more directionally neutral than these other two weeks.
Based on historical facts, stocks frequently underperform in bull markets and outperform in bear markets.
Learning how to play options expiration can be somewhat of a tedious task. Some traders even avoid the market on those days all together.
Mostly, day traders are those that are effected the most by options expiration. There are traders who can play options perfect, and then there are those that just can’t seem to get a grasps of it. The key is to note when options are expiring, so you know when to execute the right strategy.
If you want to learn more about actual options trading, then check out the definitive source for information on options trading.