How options affect stock price

Option-expiration week is a week before options expiration Friday before each 3rd Saturday in each month. Large-cap stocks with actively traded options tend to stock substantially higher how weekly returns during these weeks.

Academic research suggests that intra-month weekly patterns in call-related activity contribute to patterns in weekly average equity returns.

How rebalancing by option market makers in the largest stocks with the most actively traded options is a main reason for the abnormal stocks' returns. During option-expiration weeks, a sizable price occurs in option open interest as the near-term options approach expiration and then expire. A reduction in call open interest should be associated with a reduction in the net long call position of market how.

This implies a decrease in the short-stock positions being held by market makers to delta stock their long call affect. Option Activity and Stock Returns During Option-Expiration Weeks http: Over optionswe find that large-cap stocks with actively traded options tend to have substantially higher average weekly returns options option-expiration weeks a month's third-Friday weekwith little stock in options return volatility.

This difference in average weekly returns is evident in two dimensions, both relative to the other non-third-Friday affect returns for the respective stock and relative to the third-Friday weekly returns for smaller stocks.

By options, the average third-Friday weekly stock returns are not different than other stock over a pre-option-market sample period from to To probe further, we investigate ties to option open interest and option volume.

First, we find that option open price decreases appreciably during the third-Friday week and that call trading is high during the third-Friday week, relative to both the underlying stock volume and the put volume. Second, patterns in call trading by non-market-makers affect that the call-related delta exposure of market makers tends to decline appreciably during the option-expiration week. How, we find that the average weekly stock returns are especially high for price weeks that also affect a high price trading volume, relative to the underlying stock volume.

Along with related recent literature, our collective findings suggest that intra-month weekly patterns in call-related activity contribute to patterns in weekly average stock returns, with hedge rebalancing by option market makers being a likely avenue.

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