Attention Traders: Read This Before Options Expiration

01/14/2010 12:01 am EST


January 2010 is going to be a highly unusual month for traders who use options to speculate around corporate earnings.

Options expire on the third Friday of every month, and this month, that happens to be January 15, the earliest day on the calendar that expiration can physically fall, due to the month beginning on a Friday.

This week is also the unofficial launch of earnings season, but with only a few big names on deck before expiration day, this creates an interesting situation for options traders.

The week's only major earnings are Alcoa (AA), announced yesterday; Intel (INTC), on Thursday afternoon; and JPMorgan Chase (JPM), reporting early Friday morning. That effectively means that the only options speculation and trading around earnings that will take place this month revolves around these three issues. At the start of most quarterly earnings seasons, we usually get Google (GOOG), General Electric (GE), and at least one or two more major banks reporting before expiration day.

We generally see very active trading in options of well-known companies around their earnings report. But it is not just the company reporting that sees its stock and options respond to earnings news. Key competitors also react, as do exchange traded funds (ETFs) that are heavily weighted by the stock reporting.

For instance, Intel is approximately 23.5% of the weighting of the very actively traded Semiconductor HOLDRs ETF (SMH). And Intel's report will also impact how traders view Microsoft (MSFT), as Windows is still going into the majority of all PCs sold. But this effect will be far muted with only one reference point for earnings season before expiration day.

And with JPMorgan Chase being the only bank reporting this week, and with it being the best-operated and safest money center bank, that should leave little options trading interest in the rest of the pack, such as Bank of America (BAC) and Citigroup (C), this month.

The long and short of this is that the shortest of the short-term speculators will be kept from being able to make big, broad-based option betting strategies in the short-dated or front-month options contracts. And that will likely keep options trading volume and open interest lower than normal in many other key stocks this week.

For all the other major names reporting in the last two weeks of January, like Google and General Electric, it is not likely that traders will want to pay up for the four to five weeks worth of time value that will be priced into the February options.

When options are expensive, traders need much higher volatility to make it worth the risk, and the CBOE Volatility Index (VIX) has fallen to 19-month lows below 20.

This won't have much of an impact for the retail investor, but it is likely to limit just how much option trading comes from faster money traders like hedge funds, swing traders, options traders, and other, more speculative market participants.

However, the February options expiration date being one month and four days out from the January expiration should favor those who write options for higher premiums. 

By Jon Ogg of

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