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Stock Price Clustering at Options Expiration

Posted in Animal Spirits

A reader commented: “Re ‘Clustering of Market Closes Near Round Numbers?’, the situation in which clustering is important is at option expiration on stocks with heavily traded options. Professional option writers maximize profit when the underlying stock closes near to the strike price at which the open interest is highest. Look at GOOG and how close it gets to a number divisible by $10 on that one day a month. The odds of closing exactly on such a number are 1/1000. Look at May 15: $390.00. Only the August expiration price for GOOG was not close to a ’10’ number.”


There are academic papers related to your comments. Two of the most heavily downloaded are:

“Stock Price Clustering on Option Expiration Dates”:

“This paper presents striking evidence that option trading changes the prices of underlying stocks. In particular, we show that on expiration dates the closing prices of stocks with listed options cluster at option strike prices. On each expiration date, the returns of optionable stocks are altered by an average of at least 16.5 basis points, which translates into aggregate market capitalization shifts on the order of $9 billion. We provide evidence that hedge re-balancing by option market-makers and stock price manipulation by firm proprietary traders contribute to the clustering.”

“Has Google Stock Price Been Manipulated?”:

“We present the evidence that the GOOGLE stock, one of the most important stocks in the 21st century, may have been illegally controlled by large Wall Street firms. We identify a group of smart traders, including financial firm proprietary traders and large traders who trade options with large orders. We find that they have advance information about the closing prices on post earning release and option expiration days. These smart traders sell options to the market which would become worthless after the key events, and their high success rate is difficult to be explained by normal trading behavior. Additional evidence from the tape, such as unusually high quoted depth and extremely low narrow quoted spreads during clustering option expiration days, provide direct proof that the GOOGLE stock price may have been manipulated to coordinate the institutional traders’ option selling activities.”

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