Why I Avoid Options Expiration

A little while ago I was asked why I take the last two days of options expiration weeks off. I know I’ve mentioned the reasons several times and they’re scattered all over the site so I’ll list them here:

There are usually strange things that happen during expiration week. I’ve seen what appeared to be the beginning of big moves early in the week reverse on a dime later in the week due to pinning to strike prices.

Pinning doesn’t always happen, nor does it affect all stocks. But over time I’ve learned that it was pointless for me to try to trade close to expiration. I’ve also read that many other traders recommend avoiding expiration. I especially recall Jim Cramer talking about how he used to wrack his brain trying to ‘game’ expirations and it usually was pointless:

I can’t stand expirations.

These bizarre animals, with their own lexicon of buy and sell imbalances, of morning and afternoon close-outs, of weird spikes both up and down, don’t lend themselves to rational discourse. I didn’t always use to feel that way. I spent seven years convinced that if I pulled each trade apart and diagnosed options and common stock, I could come up with an investable pattern that would yield me steady returns.

At times I thought I had it figured out, only to sell short some OEX calls to make a dollar or two that squeezed up 10 points in the final moments of trading. I have taken outside shots on calls, after literally touching base with every important player out there on the sell side, only to discover that I should have been buying puts. And I have risked huge amounts of capital betting that stocks like Intel would go out at a certain strike, only to be undone by some fundamental woes or a lawsuit.

So, here’s what I try to do on expiration days: nothing.

Typically I try to schedule a lunch, or take a nap — yes, a conference room nap — or go for a walk. Anything to keep me from being tempted into believing that I can make sense out of the chaos that my screens are exuding.

And from another of his articles entitled “Why Cramer Takes Lunch on Expiration Fridays“:

Options expiration strikes again. Just when it looked incredibly ugly and I was prepared to hit a million bids to take away the pain, I remembered my options expiration rule: Walk away from the table, lest you do something stupid as wood to your portfolio.

Just as professional drinkers stay at home on New Year’s Eve, professional traders like to stay out of the office on expiration. You simply don’t want to cause lasting damage based on the phony nature of what occurs on expiration day.

That’s why I think the best way to play these days is to go out to lunch. Which means I take lunch 12 times a year. See you at the Grill Room third Friday in March.

I have to take some (mental health) days off so what better time than expiration which gives me a long weekend?

P.S. Cramer has a ton of articles about expiration and pinning to strikes. This section from “Taster’s Choice: The Best of Cramer” has some good info about options:

It seems nobody can get enough about options. My philosophy about options can be found in the options school at 8/22/97 as well as 8/29/97 and again at 2/13/98. I offered an options primer on 1/24/98. The perils of options, and the perils of index options should be required reading before you start trading those, as well as my own prejudice against selling naked puts. Want to know how to use puts? Try 11/22/97. Or how to use options like they are common stock? Not all options trades work out, as 1/22/98 shows.