Will The Options Tail Wag The $35 Billion Micron Technology Dog?

Summary

• Intellectually, I am not onboard with the "Options Pinning" and "Maximum Pain" theories.
• Viscerally, I have been gut-punched into a reluctant belief that there is something to these theories. Glances at brokerage statements after some Micron options expirations reinforce this reality.
• These theories hold that a large volume of outstanding options can skew a stock price at the options expiration date. Micron Technology has a mammoth 744,063 options expiring on 7/21/2017.

What's the intellectual problem?

Micron Technology (NASDAQ:MU) has a $35 billion market capitalization. How can a few options, expiring on a weekly basis, affect such a large market cap? With an open interest of 508,889 call options and 235,174 put options expiring next Friday, July 21, 2017, we are about to find out. Since each option covers 100 shares, these outstanding options control 74,406,000 shares, or about 7% of Micron's outstanding stock. That's a big number for any company, and is the largest number I can remember in the several years I've been following Micron.

Intellectually, I ought to be equipped to handle the idea that the options tail can wag the underlying stock of a company. I have a business degree, and have heard all about my excellent finance professor's friends Fischer and Myron (that would be Fischer Black & Myron Scholes of the famous and much used Black/Scholes pricing model). I sat on the options desk during my brokerage training. I've read academic papers on the topic. And I've attended numerous classes with options guru John Carter of Simpler Options.

But it just doesn't resonate in my thick head. How can options drive the price of the underlying stock? Sitting through a large options expiration with a portfolio of affected securities and visiting the mailbox for the brokerage statement following such a large expiration brings the message home with a visceral gut punch.

And what exactly is "pinning" and "maximum pain"?

There's a good, if dated, discussion on the topic on none other than Seeking Alpha back in 2011. Prof. Pearson, interviewed in the article, defines pinning as follows:

Pinning refers to the phenomenon that on option expiration Fridays the prices of optionable stocks tend to close on or very near to option strike prices.

And he defines

Analyst’s Disclosure:I am/we are long MU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.