Options expiration week is always a very volatile and sometime violent trading week. This is a time period when the institutional money will bully stocks around like a nerd on the playground. It is always important to realize that the institutional money(hedge funds, bank prop firms, mutual funds) will try and move stock prices away from the popular strike price that the retail investor or trader is betting on. It is always important to note that most retail options traders usually play options because they do not have the cash to actually by the stock, therefore, they will buy calls or puts as a cheap way of playing the stock market and settle their trades before or during the week of expiration. That is why this is such a very difficult week to trade stocks. Then when you add earnings season into the mix it is really only the true professional trader that can take advantage of the short term opportunities in the market during the week of options expiration.
Look at some of the wild and violent action in the market this week. F5 Networks Inc.(NASDAQ:FFIV) declined by 30.0 points yesterday after reporting earnings. I could only wonder how many retail options traders had calls on the 150 strike price. A call option is a bet that the stock will reach a certain price by a specified time. Oh well, I guess all those traders that bet on FFIV are just out of luck this week. Another leading stock name that was punished this week was Mosaic Co.(NYSE:MOS). On January 18, 2011 Mosaic stock was trading at $85.00. Yesterday the stock was trading down to $72.00 a share before bounce a little higher. Just think about how many retail options traders were betting on Mosaic stock to reach the $90.00 strike price. Apple Inc.(NASDAQ:AAPL), Goldman Sachs Group Inc.(NYSE:GS), and VM Ware Inc.(NYSE:VMW), all had sharp, violent action away from the popular strike prices.
Commodity stocks also joined into the options expiration tornado. Just a week ago copper, and oil were making new highs for the year and right as options expiration week began these leaders just fell off a cliff. Remember the retail options trader is usually the Average Joe or often called John Q Public. It is very difficult for the retail options trader to try and beat the institutional money that can certainly move any stock that they see fit for five trading days. The lesson here is to always trade only the best chart patterns during options expiration week and have stops on all positions.