Stock Price Clustering on Option Expiration Dates

53 Pages Posted: 22 Mar 2004

See all articles by Sophie Xiaoyan Ni

Sophie Xiaoyan Ni

Hong Kong Baptist University (HKBU)

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance; Canadian Derivatives Institute

Allen M. Poteshman

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: August 27, 2004

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

Keywords: Stock price clustering, Option expiration, Hedging, Manipulation

JEL Classification: G12, G13, G24

Suggested Citation

Ni, Sophie Xiaoyan and Pearson, Neil D. and Poteshman, Allen M., Stock Price Clustering on Option Expiration Dates (August 27, 2004). Available at SSRN: https://ssrn.com/abstract=519044 or http://dx.doi.org/10.2139/ssrn.519044

Sophie Xiaoyan Ni

Hong Kong Baptist University (HKBU) ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

HOME PAGE: http://sites.google.com/site/sophiexni/

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

Canadian Derivatives Institute ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7
Canada

Allen M. Poteshman (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

340 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-265-0565 (Phone)
217-244-3102 (Fax)

HOME PAGE: http://www.business.uiuc.edu/poteshma

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