This is a Guest Blog from RiskReversal.com's Enis Taner.
The price action in Apple this week is a classic example of a phenomenon that occurs every January when options expire.
(Read More: Al Gore Nets Another Huge Fortune Buying Apple Stock.)
When I was an options market maker, I would dread January expiry. It was a bookkeeping nightmare, since it was by far the largest expiry of the year, with hundreds (sometimes thousands) of options all expiring in my portfolio on the same day.
January expiry options are listed two years in advance (you can trade January 2015 options in many names as of today), so the options positions would build up over the course of that time. Once expiry day finally came, I had myriad residual positions to watch and clear.
(Read More: Options Explained.)
As a result, my anecdotal experience was that January expiry would lead stocks to "pin" important strikes more often than usual. Market participants would have larger-than-normal interest on particular strikes, and the mere act of re-adjusting their positions as the options expired would often lead to the stocks to pin those levels.
Take a look at Apple's 5 day chart (with the $500 level highlighted in red):
Notice how the $500 level has acted as a magnet over the course of the week. The stock actually gapped right to it on Monday after closing at $520.30 last Friday.
(Read More: Big Week Ahead for Tech Earnings.)
Sure, there have been numerous headlines driving the stock up and down in the past week, but why does it keep converging on $500?
I would argue that both the actual effect of options expiration (the 500 strike has more than double the open interest of any other strike) and the anticipated potential pin by other traders causes the price to keep revisiting that level.
Lo and behold, AAPL has traded in a relatively tight range around $500 to start Friday. This is a case where the options market is probably more important than regular stock traders realize.
As the month continues, we plan on doing more trades in anticipation of options pins for future expiries.
Enis Taner is the Global Macro Editor at Risk Reversal.com.
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