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Options Expiration And What You Should Know

 The major stock market indexes have opened up basically flat again this morning. Many traders and investors are talking about the Bush tax cut extension that is expected to be signed by President Obama as a market catalyst . This tax cut extension was already factored in by the stock market and is really not having much effect on the major stock indexes.

Next there is the quadruple witching options expiration today. This is a time when contracts will expire in stock index futures, stock index options, stock options and single stock futures. This event takes place once a quarter. Therefore, there will be four quadruple witching options expiration a year. They will occur in March, June, September, and December. During this period it is always prudent to be prepared for the unexpected. Often stocks will trade very erratic during the week leading up to the Friday expiration. This type of wild and volatile action is because the institutional money will move stocks the way they see fit. They do this in order to move the stock toward or away from the popular strike price. In other words there will be a lot of games played during the week by the big money.

Last we have the action in the U.S. Dollar Index. As we have all learned by now when the U.S. Dollar Index is trading lower the stock market will usually inflate and trade higher. This morning the U.S. Dollar Index is actually trading higher by 0.02 cents to $80.20. Therefore, the stock market is slightly lower to start the day. Traders should always keep one eye on the U.S. Dollar Index chart as the stock market will usually trade inverse to the U.S. Dollar Index.

Today is a Friday and rarely does the stock market decline sharply on a Friday. In the past 24 months there have been less than a dozen times when the Dow Jones Industrial Average closed lower by more than 100.00 points on a Friday. It is important to note that the Federal Reserve and the major institutions that move markets do not want to cause panic in the U.S. consumer over the weekend. This is when the U.S. consumer is likely to go out and spend money. In order for the quantitative easing to work for a while the U.S. consumer must spend money. Please understand that U.S. consumer spending accounts for 70.0 percent of the gross domestic product(OTC:GDP) in the United States.

The second reason that major market indexes rarely decline sharply on a Friday is because these same institutional powers that can move markets do not want to panic Asia. Please remember the Asian markets open on Sunday evening due to the different time zone. This is now a global economy and if the Asian markets decline sharply this could spill over into the fragile European and American markets on Monday. Therefore, we always just expect a flat Friday trading day. We call this the 'Friday Effect'.

Nicholas Santiago
Chief Market Strategist