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Options Expiration Whipsaw

Jan. 20, 2011 4:04 PM ETSPY
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.
Tomorrow is options expiration and if you watched the action in the market this week it is nothing short of wild and volatile. This is the one week of the month when institutional money will shake the markets both ways in order to shake out the small retail options trader. Look at the action in stocks such as Apple Inc.(NASDAQ:AAPL), Netflix Inc.(NASDAQ:NFLX), and F5 Networks Inc.(NASDAQ:NFLX) this week. These stocks have been all over the map this week trading in choppy fashion, and sometimes making violent swings in both directions. 

Many investors will say that this action in the market is due to corporate earnings and that certainly is partially true. However, if you have followed us over the years you will have noticed that this type of action that we are seeing this week occurs every month during options week. Just look at the intra-day swings today and any trader will have to admit the action is down right violent. It is important to remember that most retail options traders play options because they do not have the capital to actually purchase the stock. Therefore, these options traders usually look to settle their options before the actual expiration date for a premium gain or loss.

This is a week to trade only the best chart setups and protect profits when you get them with a stop in the money or at break even. This is not the week to get cute and look for the home run trade. Money management is essential during this week when trading the market. 

Nicholas Santiago

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