53 Pages Posted: 22 Mar 2004
Date Written: August 27, 2004
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.
Keywords: Stock price clustering, Option expiration, Hedging, Manipulation
JEL Classification: G12, G13, G24
Suggested Citation: Suggested Citation
Ni, Sophie X. and Pearson, Neil D. and Poteshman, Allen M., Stock Price Clustering on Option Expiration Dates (August 27, 2004). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=519044 or http://dx.doi.org/10.2139/ssrn.519044
By Meb Faber