Stock Price Clustering on Option Expiration Dates
Read the paperopens doi.org in a new tab
What they found
The authors documented 'pinning': on option expiration Fridays, optionable stocks close at or near a strike price far more often than chance would predict, and non-optionable stocks do not. Using CBOE data from 1996 to 2002 on who holds the options, they showed the effect is strongest when market makers are net long options, consistent with delta hedging of long gamma pushing prices toward the strike. They also found evidence of deliberate manipulation by proprietary traders who hold short option positions.
What you can use
- Stocks with heavy option open interest tend to gravitate toward a strike into expiration, because hedgers' rebalancing pushes them there.
- Whether the pin attracts or repels depends on whether dealers are long or short gamma; the direction is not automatic.
- Expect unusual price behavior on expiration days near large strikes, and do not read it as a fundamental signal.
Caveats
Pre-2003 data with monthly expirations; today's weekly and daily expirations spread the effect out. The magnitude is small (a fraction of a percent) and not easily tradable by retail.
Tags: options, pinning, expiration, gamma-hedging
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.