This column originally appeared on Options Near. 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 options can have a direct and measurable near on stock prices, especially on the last trading day before expiration. Let's look at two ways that options expiration can influence the overall market as well as specific equities, and then consider how investors should trading with these tendencies. Imagine that today is the last trading day before expiration, and that an investor has sold Google GOOG put options struck atmeaning that she has the obligation to buy 10, GOOG shares from a put owner who decides to exercise his 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. This back-and-forth action driven by the exposure of option traders causes stocks to remain close or be "pinned" to strike prices with high open interest. The effects of pin risk on stock returns have been evaluated in several academic papers. One study from found that the returns of stocks with listed options are affected by pin clustering, on average, by 0. 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. Options 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 shares 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 expiration trend, the high option gamma at expiration can exacerbate price volatility. Think of gamma as options fuel. It will not cause a fire by itself, but given the near 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. So how should stock investors adjust their portfolios and trading habits to account for the expiration-related phenomenon? 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 options effects is in the daily performance of pairs trading strategies; e. The effects of gamma-exacerbated price volatility are more serious. In individual equities, when monthly expiration looms, investors can look for option strikes that have a level of open interest that 1 is much higher than other nearby strikes and 2 is worth a meaningful percentage of the value of the stock's average daily volume. Options exposure meeting those qualifications could significantly 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 has announced surprise interest rate cuts on expiration Fridays in a transparent attempt to let the cuts have the maximum possible immediate effect. The best way to accommodate the possibility of expiration-induced price swings is to be ready 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, not all market action turns out to be as expiration as we might want it to be. Market trading love to trading causality and meaning to day-to-day stock 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 expiration, what looks like a passive market may be in part attributable to pinning. A wild day of trading, conversely, may not be purely about panicked, earnest investors, but also about the rational unwinding and resolving of prior option commitments. Portfolio Manager Jim Cramer and the AAP Team reveal their trading tactics while giving advanced notice before every trade. All of Real Moneyplus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis. Near SU10 Team uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar. With Top Stocks, Helene Meisler uses short and long-term indicators to pinpoint imminent breakouts in stocks. Your browser expiration not supported. Expiration upgrade to one of the following browsers: By Jared Woodard Follow. Stock quotes in this article: Pin Risk "Pinning" refers to the price of an underlying stock trading closer to an actively traded option strike price than it would absent the options activity. Gamma Explosion Sometimes, however, the other factors influencing price movement will easily overwhelm any nascent pinning pressure. Option Expiration and Stock Investors So how should stock investors adjust their portfolios and trading habits to account for the expiration-related phenomenon? Get an email alert each time I write an article for Real Money. More From Jared Woodard Avoid JPMorgan? Not So Fast, Jim Little Changes in Language Can Mean a Lot Conflicting Data Points Suggest Two-Speed World. At the time of publication, Jared Woodard held positions in SPX, SPY, and QQQ. Columnist Conversations Carolyn Boroden:. Options market is selling off across the board. I'm mostly in cash I suggest that you do the same. REAL MONEY'S BEST IDEAS. Select the service that's right for you! Action Alerts PLUS Portfolio Manager Jim Cramer and the AAP Team reveal their investment tactics while giving advanced notice before every trade. Real Money Pro All of Real Moneyplus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis. Model portfolio Trade alerts Recommendations for over 4, stocks Unlimited research reports on your favorite stocks. Top Stocks With Top Stocks, Helene Meisler uses short and long-term indicators to pinpoint imminent breakouts in stocks. Daily trading ideas and technical analysis Daily market commentary and analysis. Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. 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