Any time there is market-shaking news on expiration day, you rightfully have to question the timing. I refer, of course, to the SEC charges against Goldman Sachs that were released mid-morning on Friday.
Of course, there’s no way we’ll ever know if it was intentional or accidental. And it really doesn’t matter — you learn the potential impact of a move on expiration day.
There are notions out there that volatility explodes when options expire. It doesn’t, per se. What expiration does do though is magnify the trend in progress. If it’s a snoozer, it will stay a snoozer, but if something gets moving, the expiring options will add fuel to the fire.
Why? Gamma.
By the end of the day, options all have 100 delta, or expire worthless. Let’s say you’re long a put that’s just a smidge out of the money, i.e. you own the Goldman April 180 puts with the stock trading 181. You will get short under 180 but only through the close. You’ll likely bid for stock a bit below 180. Or perhaps a bit above, knowing you have a built in stop with your 180 puts. If you buy stock, maybe you go offer it out for a flip. And so on. Net effect on stock action? It will decrease volatility on the margins. All they risk though is whatever put premium remains, so not enormous pressure to do much.
Of course, for every options long there’s a short. But if you’re short the GS April 180 puts, and the stock’s meandering around, it’s highly likely you’ll do little and pretty much let nature take it’s course. Time is working in your favor.
But let’s say some shocking news pops out, say the SEC charges Goldman with fraud (I know, I know, the SEC would never do that), and the stock starts tanking. Well, guess what, the put shorts now must scramble and either chase the puts or start shorting the stock. And unlike put longs, the shorts have open-ended risk, so they truly do have reason to panic. Before you know it, GS has hit another strike, and the 175 line shorts must take action. And so on, down to the 160 line, which did come to life before closing worthless.
No way to know where GS would have gone on non-expiration day, so we can’t make any declarative statements here. But it’s pretty clear that the panic-stricken options shorts add fuel to a move in progress. And the fact that all options go binary only makes it worse.
And just an aside, but I can’t emphasize the devastating nature of an expiration day move out of the blue through four strikes that were at or near worthless. Market makers and specialists in GS options will all have good-sized positions. Some basically won the lottery on Friday and probably made their year, others on the wrong end could have blown out.
I cringe any time someone blames something other than their trading decisions for a bad loss, but this is one of those times where good and bad luck truly played an enormous part.
Related Articles:
- Options Don’t Expire on Fridays
- 6 Expiration Day Traps to Avoid
- How to Manage Expiring Options Positions
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