I predict the price ends with 00
Quantitative Finance
Level
1
On days of option expiration, why does the stock price tend to stick to option strike prices?
Market maker manipulation
Market expectation
Witching hour
Hedging activities
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1 solution
On days of option expiration, those who are long calls and puts will need to hedge their delta exposure. This applies especially to option market makers, who tend to want to stay delta neutral.
Assume that the stock starts to trade close to a strike (say 100). When the stock goes above 100, then those who are long a call may choose to hedge their exposure by selling stock above 100 (in anticipation of exercising the call). If the stock trades down below 100, then they will not exercise the call, and instead buy back the stock from the market.
A similar situation happens for those who are long the put. When the stock trades below 100, then those who are long a put may choose to hedge their exposure by buying stock below 100 ( in anticipation of exercising their put). If the stock trades up above 100, then they will not exercise the put, and instead sell the stock to the market.
Hence, these hedging activities would cause the stock to "stick" towards a strike price leading up to the close, especially if there is a lot of open interest on the strike. There could be slight drift away from this strike price on the next trading day, because there is no longer a need to hedge.