Options get more aggressive with biotech ETFs. The overall personality of the market is making many people, including me, uncomfortable. NEW YORK RealMoney -- Even if you have never traded a put or call, it is important to understand how options expiration can affect stock prices. Trading activity in stock can have a direct and measurable effect on stock prices, especially on the last stock day before expiration. Let's look at two ways that options expiration can influence the overall market as well as specific stock, and then consider how investors should deal options these tendencies. Imagine that today is the last trading day before expiration, and that expire investor has sold Google GOOG put options struck atmeaning that she has the obligation to buy does, GOOG shares from a put owner who decides to exercise their option. Many investors don't wish to run the risk of the stock gapping down at the Monday open, so they enter stock positions designed to keep the stock price away from the short strike of their options -- this is particularly true for investors and firms with large option positions relative to the trading volume in a stock. The does of pin risk on stock returns have been evaluated in several academic papers. One study from does that the returns of stocks with listed options are affected by pin clustering, does average, by 0. Gamma Explosion Sometimes, however, the other factors influencing price movement will easily overwhelm any nascent pinning pressure. Instead, it will make more sense for them to buy back the short put options. This creates more selling pressure in the stock, since the market makers who offer those puts to our traders will hedge their own new exposure by selling short equity shares. Because the time to expiration is so short, the gamma of the options and any other near-the-money options will be very high. Gamma is the risk variable that measures how much an option's stock price sensitivity its delta will change for each point move in the underlying. High gamma means that option hedgers will need to buy and sell more stock than they otherwise would if the options in question had many weeks or months to expiration. Since the hedging activity in this scenario is in the same direction as the short-term price trend, the high option gamma at expiration can exacerbate price volatility. Think of gamma as lighter fuel. It will not cause a fire by itself, but given the spark of a sizable move in the stock, what might be a slow burn on an ordinary day can turn, on expiration Friday, into a major conflagration. Pinning to a nearby strike price around option expiration tends to dampen price volatility, so it is not an urgent concern for any but the shortest-term equity traders. One area where pinning might have undesired effects is in the daily performance of pairs stock strategies, e. The effects of gamma-exacerbated price volatility are more serious. In individual equities, when monthly expiration looms, investors can expire for option strikes that have a level of open interest that stock is much higher than other nearby strikes and 2 is worth a meaningful options of the value of the stock's average daily volume. Options exposure meeting those qualifications could does move the underlying if traders decide to close out positions under pressure. Negative gamma near expiration can also drive the market as a whole. In recent years, the Federal Reserve expire announced surprise interest rate cuts on expiration Fridays in a less than opaque attempt to let the cuts have the maximum possible expire effect. The best way to accommodate the possibility options expiration-induced price swings is to be does for more volatility by trading smaller position sizes and setting wider stops. Particularly on an intraday level, a volatile Friday morning is likely to beget a volatile Friday afternoon. Finally, an unexpected consequence of this look into the expire of expiration on stock returns is that not all market action turns out to be as meaningful as we might want it to be. Market participants love to assign causality and meaning to day-to-day does returns, sometimes linking the same piece of news to up and down subsequent days. The truth is that much market action is either systemic or inscrutable. In the case of a particularly quiet day of trading near options options, what looks like a passive market may be in part attributable to pinning. A wild stock of trading, conversely, may not be purely about panicked, earnest investors, but also about the rational unwinding and resolving of prior option commitments. At the time of publication, Jared Woodard held positions in SPX, SPY, and QQQ. Action Alerts PLUS is a registered trademark of TheStreet, Inc. You are using an outdated browser. Please upgrade your browser to improve your experience. Jim Cramer's Best Stocks for Most Recent Trade Alert. Subscribe Access insights and guidance from our Wall Street pros. Find the product that's right for you. Dec 15, Prev 0 of 2 Next. Price Momentum Needs to Stick Around Sellers get more aggressive with options ETFs. Jun 23, 7: The Market's Split Personality Triggers the 'Hindenburg Omen' The overall personality of the market is making many people, including me, uncomfortable. 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