Market Manipulation Schemes at Option Expiration

38 Pages Posted: 4 Feb 2020

See all articles by Ken Danger

Ken Danger

Commodity Futures Trading Commission

Matthew Flagge

Commodity Futures Trading Commission

James Outen

Commodity Futures Trading Commission

Date Written: October 15, 2019

Abstract

This paper discusses market manipulation schemes on option expiration dates. We show that under ordinary circumstances, writers, but not holders, would have an incentive to manipulate the expiration of standard options, but both are incentivized to manipulate cash-settled options. Using our baseline results, we examine profits and incentives for a number of common option strategies. We then discuss a number of novel changes in modern option markets, such as automatic (as opposed to optional) exercise, different methods of calculating settlement prices, and passive exit strategies, and how these innovations affect the incentives to manipulate. Finally, we discuss manipulation for positional as opposed to profit-taking motives and examine several recent regulatory cases involving option manipulation.

Keywords: Manipulation, Hedging, Option Expiration

JEL Classification: G12, G13, G18, K22

Suggested Citation

Danger, Ken and Flagge, Matthew and Outen, James, Market Manipulation Schemes at Option Expiration (October 15, 2019). Available at SSRN: https://ssrn.com/abstract=3520933 or http://dx.doi.org/10.2139/ssrn.3520933

Ken Danger

Commodity Futures Trading Commission ( email )

1155 21st Street NW
Washington, DC 20581
United States
202 418 5576 (Phone)

Matthew Flagge (Contact Author)

Commodity Futures Trading Commission ( email )

United States

HOME PAGE: http://www.cftc.gov

James Outen

Commodity Futures Trading Commission ( email )

United States

HOME PAGE: http://www.cftc.gov

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