Stock price clustering on option expiration dates

Sophie Xiaoyan Ni; Neil D. Pearson; Allen M. Poteshman

doi:10.1016/j.jfineco.2004.08.005

Stock price clustering on option expiration dates

Sophie Xiaoyan Ni
, Neil D. Pearson^*
, Allen M. Poteshman

^*Corresponding author for this work

Department of Accountancy, Economics and Finance

Research output: Contribution to journal › Journal article › peer-review

102 Citations (Scopus)

Abstract

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 rebalancing by option market makers and stock price manipulation by firm proprietary traders contribute to the clustering.

Original language	English
Pages (from-to)	49-87
Number of pages	39
Journal	Journal of Financial Economics
Volume	78
Issue number	1
DOIs	https://doi.org/10.1016/j.jfineco.2004.08.005
Publication status	Published - Oct 2005

User-Defined Keywords

Hedging
Manipulation
Option expiration
Stock price clustering

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10.1016/j.jfineco.2004.08.005

Cite this

@article{ac175c3922c74dcba362d3d21c862cbb,

title = "Stock price clustering on option expiration dates",

abstract = "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 rebalancing by option market makers and stock price manipulation by firm proprietary traders contribute to the clustering.",

keywords = "Hedging, Manipulation, Option expiration, Stock price clustering",

author = "Ni, \{Sophie Xiaoyan\} and Pearson, \{Neil D.\} and Poteshman, \{Allen M.\}",

note = "Funding Information: We thank Joe Levin, Eileen Smith, and Dick Thaler for assistance with the CBOE data, and thank the Office for Futures and Options Research of the University of Illinois at Urbana-Champaign for supporting Sophie Xiaoyan Ni through the Corzine Assistantship and for partial financial support of the Ivy DB data from OptionMetrics. The suggestions of an anonymous referee were especially helpful in improving the paper. The comments of Marco Avellaneda, Kerry Back, Dan Bernhardt, Bill Christie, Ryan Davies, Steve Figlewski, Jeff Harris, Larry Harris, Narasimhan Jegadeesh, Michael Lipkin, Stewart Mayhew, George Pennacchi, Bill Schwert (the editor), Joshua White and seminar participants at Louisiana State University, Rutgers University-Camden, the Securities and Exchange Commission, the University of Florida, the University of Illinois at Urbana-Champaign, and the University of Iowa are also gratefully acknowledged. We are responsible for any remaining errors. ",

year = "2005",

month = oct,

doi = "10.1016/j.jfineco.2004.08.005",

language = "English",

volume = "78",

pages = "49--87",

journal = "Journal of Financial Economics",

issn = "0304-405X",

publisher = "Elsevier B.V.",

number = "1",

}

TY - JOUR

T1 - Stock price clustering on option expiration dates

AU - Ni, Sophie Xiaoyan

AU - Pearson, Neil D.

AU - Poteshman, Allen M.

N1 - Funding Information: We thank Joe Levin, Eileen Smith, and Dick Thaler for assistance with the CBOE data, and thank the Office for Futures and Options Research of the University of Illinois at Urbana-Champaign for supporting Sophie Xiaoyan Ni through the Corzine Assistantship and for partial financial support of the Ivy DB data from OptionMetrics. The suggestions of an anonymous referee were especially helpful in improving the paper. The comments of Marco Avellaneda, Kerry Back, Dan Bernhardt, Bill Christie, Ryan Davies, Steve Figlewski, Jeff Harris, Larry Harris, Narasimhan Jegadeesh, Michael Lipkin, Stewart Mayhew, George Pennacchi, Bill Schwert (the editor), Joshua White and seminar participants at Louisiana State University, Rutgers University-Camden, the Securities and Exchange Commission, the University of Florida, the University of Illinois at Urbana-Champaign, and the University of Iowa are also gratefully acknowledged. We are responsible for any remaining errors.

PY - 2005/10

Y1 - 2005/10

N2 - 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 rebalancing by option market makers and stock price manipulation by firm proprietary traders contribute to the clustering.

AB - 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 rebalancing by option market makers and stock price manipulation by firm proprietary traders contribute to the clustering.

KW - Hedging

KW - Manipulation

KW - Option expiration

KW - Stock price clustering

UR - https://www.scopus.com/pages/publications/25444492603

U2 - 10.1016/j.jfineco.2004.08.005

DO - 10.1016/j.jfineco.2004.08.005

M3 - Journal article

AN - SCOPUS:25444492603

SN - 0304-405X

VL - 78

SP - 49

EP - 87

JO - Journal of Financial Economics

JF - Journal of Financial Economics

IS - 1

ER -

Stock price clustering on option expiration dates

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