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THE MARKET WHISPERER 48 1

understand the meaning of these expirations. This is when the big options
players, professional organizations, can dictate market direction. Of
course you may ask what connection exists between options expiration
and intraday trading. Well, there is a connection. Options trading is highly
varied, and much of the trading is impacted by the activities in the options

market. Therefore, as I will explain later, options expiration noticeably

influences intraday trading, especially on the actual day of expiration.

What is an Option?

To understand the influence of options on stock prices, I will try to give

a definition at the most superficial level for options. An option is a contract

between the writer (seller) and the buyer, according to which the seller

allows the buyer, in return for a set price (the option price), to buy or sell

a stock for a predetermined quantity and price (the strike price). Instead

of trying to understand the previous sentence, let’s focus on the following

example: Assume that you believe that Apple’s stocks will drop in price. You

can profit in two ways from this drop: by shorting it (which we learned) or
by buying options called put options. By contrast, if you believe the stock
price will rise, you can either buy the shares or buy the options, known as
call options. Let’s say you bought a put option and the price did indeed fall.
When the option expires (the third Friday of the month), you can realize
a nice profit. But if the price did not fall, or even if it fell slightly less than
what you expected, you may lose the entire cost of the option purchase, and
the seller of the option will profit. Of course the total process is somewhat
more complex and includes various expiration dates and strike prices, but

the above is sufficient to grasp the concept.

Pros Always Profit
Options writers are experienced pros who earn their living from trading

in options. They know better than most investors how to evaluate the
probability of Apple’s stock falling, for example, and can price the option
accordingly so that their risk of loss is extremely small. Statistics show
that most options expire worthless, and the pros, as can be expected, make
their profit.

SMART On the week that options are due to expire, expect volatility
MONEY in the stock market on Tuesday and/or Wednesday, though
more often on Wednesday, and sideways movement on
Thursday and Friday.