By Nicholas Santiago on July 14th, 2010 3:36pm Eastern Time
Welcome to 'whipsaw Wednesday'. This is the Wednesday during the week of options expiration. Often this day is the most volatile and choppy day of the week during options expiration. Today that is very evident as the SPDR S&P 500 Index ETF (NYSE:SPY) and SPDR Dow Jones Industrial Average ETF (NYSE:DIA) have been all over the map today. For example the SPY traded down to 109.00 shortly after the open then rallied up to the 110.00 area by lunch time. After reaching that level the SPY traded back down to the 109.00 level again. All of this action occurred by 2:30 pm EST. This is why we call this day 'whipsaw Wednesday'.
It is important to remember that a lot of institutional games get played during the week of options expiration. Look at last month when the market was in a severe downtrend. The market somehow caught a big bid higher for the week of options expiration. Last month was also a quadruple witching which means that options contracts were expiring on stock index futures, stock index options, stock options and single stock futures. You don't think after the amount of puts bought on the market last month at the lows that the institutional money was not going to allow the amateur retail options trader to cash in do you? Of course not. The same goes for this month. I can only imagine how many inexperienced traders bought puts on the indexes in early July after hearing about the so called 'Death Cross', and the head and shoulders top pattern on every business channel in the world. Remember it is the institutional money can move markets when they see fit and they can certainly do it for a week if they need to.
As traders and investors all we can do is try to follow the big institutional money on both the long and short side. That is what a trader does. There are very few people that can move a stock as large as Exxon Mobil Corp (NYSE:XOM), or Google Inc (NASDAQ:GOOG). It is the institutional money that moves these stocks. That is why we always say if you can read the chart you can make the trade. Options expiration week is always a time to be cautious as the institutions will move the stock price away from the popular strike if it will benefit them. Look at today's action as there was a whole lot of shaking going on.
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