Friday, August 21, 2009

Options expiration stragedy

I noticed a pattern that has worked out well for the past 18 months. I have noticed that on the third Friday of each month, a pattern has developed with the Russell 2000 index. If a person purchases the Russell 2000 call option on the Thursday afternoon preceding the third Friday of the month (options expiration), 5 out of 6 times, the call option will close a few points higher in the money. The Russell 2000 options are European style options which mean their cash value is determined by the opening price of each individual security in the index on the first trade of that morning. Many times, it is possible your cash settlement value is higher than any price the index itself traded that day since all securities don't start trading at the same time.

I thought for sure the pattern would be broken today. The index traded lower after hours, and was looking pretty sad overnight, but just like several times last year, something happens late in the night or early in the morning to reverse those indices. Is this market manipulation, I don't know, but it is a way to make money.

Treasury Paulson was particularly good at doing this. He always timed with Fed announcements of cash infusions in the markets on these days. Maybe he was helping his buddies out at Goldmach Sachs.

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