Believe it or not, this Friday is options expiration for the month of August. After experiencing last week's crazy action in the stock market this week could see more of the same type of wild intra-day swings. Often during the week of options expiration the major stock indexes and the popular stocks will trade in a very volatile and choppy fashion. Traders should expect more intra-day ups and downs throughout the rest of the trading week into the close on Friday. This is a week of institutional game playing. It is important to remember that it is the institutions that move markets and not the individual trader.
You see, the institutions will usually look to see where the small retail options traders have placed there bets. If the small retail options trader has bought a fair amount of puts on the market during last week's decline it is a good chance that the large institutions will rally the market this week. The opposite would be true if the small retail options trader bought call options last week, then the institutional traders would usually drive the markets lower this week. It is important to note that many of the small options traders will rarely, if ever, hold their position into the Friday expiration. Usually, the small retail trader is simply looking to capture a gain in the premium paid for the option. If they have a loss, they will either close out the position for a loss or let the options position expire worthless. Rarely, if ever are the small retail options traders looking to take possession of the stock. Most small retail options traders simply do not have the money to buy stocks directly and that is why they are playing options in the first place. The institutional traders know this and will capitalize every month.
How do the institutional traders know when a small retail options trader takes a position? This is easy, when a small retail options trader takes a position they will usually buy just a small number of contracts. An institution will not initiate a one or two contract position instead they will take a thousand contract position or more. These days there are elaborate computer programs that keep track of the small number of contracts purchased. This is why it is important for the small retail options trader to not buy the option during the current month. The small retail options trader should always buy an option contract a month out and that will give them a fighting chance against the big money institutions.
Most games will be played by the institutions in the popular stocks and on the indexes. Therefore, stocks such as Netflix Inc.(NASDAQ:NFLX), Amazon Inc.(NASDAQ:AMZN), Sandisk Corp.(NASDAQ:SNDK), and Akamai Technologies Inc.(NASDAQ:AKAM) and others will usually see very volatile action this week. This is a week to expect the unexpected. There will usually be lots of rumors and ridiculous reports being released into the Friday expiration. This is a time to be short term and protective of all trades. When you combine options expiration and the recent activity in the stock market get ready for an increase in volatility this week.