expiration effect

Expiration Effect

expiration effect

Investors can cushion themselves from the expiration effect by adjusting their stock trading strategies to accommodate the volatility that can occur on expiration days. The major market moves triggered on these days can cause problems for investors who enter market orders at the open or close. This is especially true when buying or selling the blue chip stocks that make up the major indexes and therefore reflect the most volatility. Limit orders can help investors protect themselves and even profit from expiration day volatility. A limit order indicates the maximum price at which an investor will buy a stock or the minimum price at which he or she will sell it. That order will be executed only if the stock reaches the specified price. An investor who expects the stock price to fall on expiration day could enter a limit order to buy the stock at a lower price. An investor who expects the stock price to rise on expiration day could enter a limit order to sell the stock if it moves higher than its original price. If the stock reaches the limit order price, the broker will execute the order. If the stock doesn't reach the price set by the investor, the limit order won't be executed and the investor will retain his or her original position.