Options and Monday’s Lows

Sometimes, short term mechanical concerns can magnify market moves.

Example: Consider option gamma and this week’s option expiration on Friday.

Very often, as we get closer to expiration, the underlying relationship between equities and their options can exacerbate market moves in both directions. Given the recent move off of the peak highs, and where many option traders made their purchases, the potential to dramatically impact downside action exists.

That’s especially troublesome if Monday’s lows on stocks are violated.

I am oversimplifying, but if Monday’s lows are breached, the ‘gamma’ effect of options may come into play. Gamma = Change in Delta/Change in Underlying Asset. As out of the money options go ‘into the money,’ it could force traders to rebalance their hedges, which in turns further aggravates the move to the downside.

As we get closer to Friday’s expiry, there is little premium left on expiring options. That can create a more intense gamma effect. (Options traders:  Please  correct my phrasing; I was never a trader on an option desk, and I may be misusing terms of art) .


This is merely a short term trading observation. Just an FYI . . .

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  1. dblwyo commented on Oct 16

    Gracias – have you considered refreshing your outlook on the four engines of the market ? Also what about the other big 4 (fundamentals, technical, psysch & sentiment) ?

  2. michael schumacher commented on Oct 16

    and right on cue the day’s repo from Bennie boy is oversubscribed by a factor of over 10…..


    Pining for another rate cut by artificially oversubscribing the repo’s as we get closer to the fed mtg.

    The repo’s only began to be overdone just last friday…..coincidence??? Not on your life. They will continue to do this up until the fed mtg regardless if they need the cash or not. All part of the game.

    Pretty sad that it’s just that easy to pump the fed…

    BTW that $100 billion for MLEC is just the start of much larger amounts as the banks will need that much EACH Qtr. to remove these “issues” from the radar……


  3. StarbucksSpouse commented on Oct 16

    As a former options trader, I’m a little confused by when you say “where many option traders made their purchases”. Did you mean to say the traders were short gamma, and thus had purchased stock when stocks were going up? If so, then the gist of the post is right. But I read “purchases” to mean “options purchases”, which would make the post incorrect.

    The phenomenon you are describing here is “pin risk” – or the risk the options guys run of the stock expiring at the strike. I’d say a lot of guys try to get out of these positions earlier in the week so they don’t have to deal with it on Friday. But if it’s a very high volatility name, then sometimes they wait, because they don’t want to spend a lot of money buying back premium with only 3 days to go.

  4. Justin commented on Oct 16


    So the anticipated stronger “pin action” (down move on the underlying, toward the strike price) would only apply to the options that are expiring this month, right? Not to any option with expireys in further out months?

  5. Das Gherkin commented on Oct 16

    Michael Schumacher,

    I sometimes wish you had your own blog. Do you?

    I would love to read a comprehensive take on how you think this game is played.

  6. michael schumacher commented on Oct 16

    no I do not……too many blogs out there.

    My strong point is not collecting the data or finding it….it’s analyzing it and reading between the lines. I am not that different than many others. With my observations that tend to be what people call conspiratorial I really wish that I was wrong but there is much evidence that supports what I’ve said.

    one of the best quotes I’ve seen here came from Barry I think…”you won’t see anything if your head is inside your ass” or something along those lines…….truer words have not been spoken.

    Just like Turkey is going to “invade” Iraq…


  7. Justin commented on Oct 16


    What do you put the odds at for that happening? It sure would help my positions. He I want war to help my positions, isn’t that sad….lol

  8. michael schumacher commented on Oct 16

    Think about that for a second……

    How many U.S. troops are sitting within less than a day’s drive from the capital of Turkey?

    More to the point, one of the largest air bases the US has in the area is in Turkey, Incirlik (SP?)

    I think you have the answer….

    When “Strikes in Nigeria” no longer has the desired result of pumping oil then you try something else……


  9. Das Gherkin commented on Oct 16

    “My strong point is not collecting the data or finding it….”

    I’ll take your word for it, but you are always tossing around all that repo data…

    So who’s pumping the oil up. Hedge funds still? Are they still playing that futures game (buying then cancelling contracts) with the crude futures. I’m getting ready to take the other side of the oil bet…I know it’s crazy, but I have the time to let it play out.

  10. Estragon commented on Oct 16


    We’re way off topic here, but seeing as there’s a new post up I’ll chime in on the Turkey thing.

    That US troops are a day’s drive away doesn’t matter. Any sort of military confrontation between the US and Turkey is simply out of the question at this point.

    My read on this is that Turkey has real
    concerns with Kurds from Iraq supporting the Kurdish insurgency in Turkey, and they’re annoyed the US isn’t able (or perhaps willing) to keep the Iraqi Kurds better controlled. From the US standpoint, the Turkish sabre rattling may even be helpful to the extent that it pressures the Iraqi government to get on with stabilizing the country. Absent that stabilization, Iraq probably splinters, and Turkey will want act to ensure a big hunk of Turkey doesn’t end up in a greater Kurdistan.

    My guess is the Turks will get quiet assurances that if the situation in Iraq degenerates into chaos, Turkey has tacit permission to do what it sees fit. The Iraqi kurds will probably figure that out, and they may see it as being in their interest to move an Iraqi comprimise forward.

    I wouldn’t put this down to oil interests jamming prices up. In fact, it isn’t in conventional producers medium/long term interests to do so. Even at these levels, we’re already beginning to see substitution, demand destruction, and increased exploitation of higher cost reserves. The thing in Turkey makes lots of sense all by itself.

  11. michael schumacher commented on Oct 16

    Data sources:



    I make it a point to check these sites in the context of whatever crap that comes out of the Fed and Treasurey. It’s easily and widely available…….you must come to your own conclusions which lends itself to the smoke and mirrors approach that both these entities have in reporting the reality of what all this “liquidity” is really doing.


    I hear you…however NOTHING will occur in that region of the world unless we let it. Now that can be because of stupidity (we’ve seen how well Iraq is going) or an attempt to actually facilitate Turkey’s fear of being overrun by people it does’nt really like.

    I still do not see how the public is supposed to believe that Turkey is going to defy the US and invade Iraq, but that would be oh so fitting on GW’s watch would’nt it

    Refugee or political issue aside…..Turkey is our lap dog in the middle east along with the saudis.


  12. Bob commented on Oct 16

    Adam Warner on Minyanville
    “Barry Ritholtz has a writeup here on the “Gamma effect”… and gets it pretty right”

  13. jopo commented on Oct 16

    anyone who calls himself ‘the pickle’ gets my vote…

    you should remember barry, for everyone who’s short gamma, there’s someone on the long side.
    classic expiration play is to push the short players to puke…hit their sell stops on the down side, and their buy stops to the upside. so long as the mkt remains hedgeable, doesn’t criss-cross their strike or significantly gap open, they shouldn’t feel a dramatic amount of pain.
    conversely, the long players want the market to go to extremes, and although they may be making a punt, they don’t necessarily want to be naked short or naked long when they exercise their in-the-moneys, hence they will also be hedging…buying to the downside, and selling on any rallies…it’s a high stakes game of chicken, if you will. who is going to blink first? generally the short players will, because they have more significant risk, but eventually the long players will step in to hedge. in the end, the short gamma players will exacerbate any initial move, but the long players will ultimately provide a floor, and in many occasions, create a reversal, even a squeeze, as they scramble to lock in their profits…unless, of course, they’re really greedy.

  14. hmmm… commented on Oct 16

    If options players were net buyers of options hence gamma, hedging the delta will not aggregate the move but quite opposite. If they were long starddles @50, and thursday the stock price is 51 they will hedge the delta and sell, if the price goes to 49 they will buy back hence will make $2 from trading the gamma. If ppl are net long options then gamma hedging (dis)aggregattes the move.

  15. hmmm… commented on Oct 16

    aggravate not aggragate of course

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