When options contracts expire, the movement of certain stocks in the market can be affected. This year, options expiration (OpEx) week has made the third week of the month a significant event for traders of all kinds.
Here's an explanation of what OpEx week is and how option and stock traders can use it to keep tabs on the market (and figure out where it might go next).
What's OpEx week?
As of Nov. 15, OpEx week is here again. OpEx means options expiration, so OpEx week refers to the time in which many options contracts collectively expire. As a result, options traders must exercise their options, a move that can sway the stock market.
Does OpEx week happen every month?
OpEx week largely occurs during the third week of each month and has returned for November. It usually occurs during the third week, not the third full week, of the month—meaning even if a month started on a Friday, the third week of the monthly calendar will still be OpEx week. This month, options are set to expire on Nov. 19. Next month, options will expire on Dec. 17.
When a holiday lands on the end of the third week, an options expiration date will shuffle around to accommodate the close of the stock market. If Friday is a holiday, options traders will exit their positions on the previous Thursday.
How the stock market reacts to options expiration week
Historically, OpEx weeks end on an upswing, but stock market behavior can turn bearish in the following week. As options expiration inches closer, options contract issuers incur bigger risk. Meanwhile, trading activity in the options realm can directly impact stock prices.
There's also something called a "pin risk," which refers to the risk of having to take delivery of the shares if you have issued options. According to Quantified Strategies, "Many traders and investors don’t want to have the risk of being the owner of those shares over the weekend in case they get exercised." As a hedge against this risk, they may sell the underlying shares, contributing to stock volatility.
Bottom line on the OpEx week effect
The OpEx week effect (as it's known) hasn't always been the stock market phenomenon it is today. Its effects can mostly be seen from 1990 on, which makes sense—options trading derivatives really took off then.
As for whether you should trade on the OpEx week effect, the impact can be minimal unless you have a firm involvement in options trading and can capitalize on price increases with greater volume. Still, some chart-analysis platforms have helped investors by adding an OpEx week filter that you can integrate into your investing strategy.
OpEx week especially impacts large-cap stocks with actively traded options, so that's a good place to focus your energy if you're going to test the waters of the OpEx week effect. Bear in mind that external factors, like updated Fed data, individual company earnings, and stock market trends (like the September sell-off, for example) also play a role in the final results.