Option Expiration

[kxchan]

Is it true that it is almost generally reasonable to exercise the options close to or at the expiration date? If this is the case, the underlying stock price will tend to cluster, won't it? What is the rationale behind this phenomenon?

 

[Martinghoul]

Is it true that it is almost generally reasonable to exercise the options close to or at the expiration date? If this is the case, the underlying stock price will tend to cluster, won't it? What is the rationale behind this phenomenon?

Yes and no. Yes and no. What phenomenon precisely?

 

[kxchan]

I mean the tendency of the underlying assets to violate the put-call parity when the options are close to expiry date

 

[Martinghoul]

Well, that's a bit of a funny one. Firstly, put/call parity for European options holds, unless you're very very close to expiry, where things can get disorderly. For American options, put/call parity isn't really supposed to hold fully in the first place, so hard to generalize.

Again, not entirely sure what phenomenon you're trying to investigate here. Is it the various pin-related market effects that occur very close to expiry? Or is it the general tendency of the price of the underlying to gravitate towards certain strikes (that was what I originally thought you meant)?

 

[kxchan]

I am trying to investigate 2 things. Firstly, you got it absolutely right, which is the various market effects that occur as we are moving towards expiration. Secondly, the effect on put/call parity or other valuation methods for various periods until the expiration.