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As we enter the week of options expiration the bulls and bears are playing a fierce game of tug of war.

Europe, more specifically the Euro (NYSEARCA:FXE), continues to be the leading factor of the huge daily swings and until it is resolved I expect we will see similar price action going forward.

While, four of the five last trading sessions were positive we had an absolutely ugly day on Wednesday and one that could be a precursor of things to come as we move into 2012.

The move came as the Italian bond rate pushed above 7%, which many see as a threshold for inevitable Italian default. However, many economists and banks have come out with thresholds far lower than 7%.

The loss on Wednesday was the worst one-day percentage drop for the S&P 500 in about three months. Many were spooked by notion that Italy’s economy is far too large to be aided by a bailout.

In my opinion, if you actually sit down and do the math, you will clearly see that Europe is in a dire situation. How can they possibly afford to pay for defaults in four to five European economies? The answer – they can’t. At this point they are just kicking the can down the road and hoping for a miracle.

So, after the stark realization that a bailout in Europe seemed frivolous Wednesday and the significant plunge, why did we see such a significant turnaround Thursday and Friday?

Europe must have received funding from the BRIC countries? Japan? China? Buehler?

Nope – none of the above occurred. What did occur is that Greece and Italy changed leaders.

So, let me get this straight, the European markets are on the brink of complete failure and now that we have two new leaders in the two European countries that are, in many economists opinions too far gone, the market is going to rally and rally hard?

It truly doesn’t make sense and quite honestly I am not going to try and make sense of it. It is a futile effort and one that is completely out of my control.

During times like these you have to remain diligent. Volatility remains high, so selling premium is advantageous. Moreover, if we get a sharp decline going forward volatility will surely increase and inflated premium will follow. I love this type of market environment. Uncertainty allows options sellers to sell premium at far higher prices than they would otherwise be able to when the VIX is trading at its historical norm around 15.

I had another very good trade in the High-Probability, Mean-Reversion strategy this past week and if all goes well the strategy should finish up its first year (since being monitored by a third party website) up over 40%. Not bad considering the market is barely treading water.

As for the Theta Driver strategy we should have another good trade about to expire this week I added a new December position this past week with the likelihood that I will be adding another this week. Stay tuned!

Technically speaking, all of the major indices are currently in a short-term neutral state so there really isn’t an edge there.

Mid-November is historically very weak and then the bullish bias picks up a bit as we head into the Thanksgiving holiday. I would expect to see the same this year.

One thing is certain the upcoming week of options expiration will be an eventful one. I, for one, can’t wait to see how it plays out.

Source: Options Expiration Is Upon Us