The Tail Wagging the Dog

The third business friday of the month is expiration week for stock options. For December it happens to be this friday. What you'll see if you watch the stocks with large options volume is they'll become pinned at one of the strike prices near the price at the begining of the week. Large institutional investors who have bought or sold certain calls or puts need the stocks to be at a certain price when they expire to achieve maximum profitability. Thus they use they're large buying or selling power to pin the price down to the next lower strike, or up to the next highest strike. Since options are stock derivatives, they should derive their price from the price of the stock. But, here is we have the opposite happening, thus the tail is wagging the dog.

To amuse yourself, pick a major stock and look at the options chain. Watch the stock price as it becomes pinned to one of the stock prices. MO is pinnned on 85. GS reported a great quater but is still pinned on 200. I thought MA would stay at 100 after monday, but now it looks to be pinned on 95. GSF is headed for the 65 strike. Nearly every stock in the portfolio is headed for a pinning as well. Not to worry though, after this week they'll be free and clear to go where ever they want to. So for some stocks it may present buying or selling opportunities.

Last week I added a few names to the portfolio on weakness thursday. I still like gold and oil services the best right now. If BJS doesnt break out next week past the 32.5 strike price, I'll swap it out for RIG, BHI, or HAL, not sure which, need more research on it. As far as the overall market goes, the last couple weeks will be one of two things: either a nice consolidation before a continuation of a bull run, or the beginning of a turnover to the downside. Guessing which is difficult at best, both have good arguments, but rather than guessing I think its best to have a plan for both. Right now, I'm in favor of sitting tight and waiting for one or the other to develop.

Later,
MC