Beware Options Expiration – Volatility Ahead.

Options expiration is the date on which an options contract becomes invalid and the right to exercise it no longer exists. On this date, the option is said to expire. The expiration date for all listed stock options in the U.S. is the third Friday of the expiration month.

Options expiration can have a significant impact on the prices of the underlying stocks. When options expire, the price of the underlying stock can be affected by the actions of options holders. For example, if a holder of a call option (the right to buy a stock at a certain price) chooses to exercise their option, the price of the stock may increase. Similarly, if a holder of a put option (the right to sell a stock at a certain price) chooses to exercise their option, the price of the stock may decrease.

Additionally, options expiration can also affect the price of the underlying stock due to a phenomenon known as “pin risk”. This occurs when the stock price is close to the strike price of a significant number of options contracts. In this case, some options holders may choose to exercise their options, leading to a sudden change in the stock’s price.

Another factor that can affect the prices of underlying stocks during options expiration is “Delta Hedging”, which is a strategy used by market makers and option traders to hedge their positions by buying or selling the underlying stock. As options expiration approaches, market makers and traders may adjust their delta hedging positions, which can cause the price of the underlying stock to change.

In summary, options expiration can have a significant impact on the prices of underlying stocks. Factors such as option holders exercising their options, pin risk, and delta hedging can all contribute to sudden changes in stock prices during options expiration. As an investor, it’s important to be aware of these potential risks and to monitor your positions closely during options expiration.

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