Cbapter 30: Stock Index Hedging Strategies 565 
However, this flurry of block prints on the close might drive the index down by 2 or 
3 points! This is an extremely large move for the index, and the option trader has no 
recourse as the options cease trading. An index composed of only a few stocks, such 
as the Dow-Jones 30 Industrials, will fall most dramatically when these events occur, 
although the OEX will drop heavily as well. 
We have also previously seen that the late market action on expiration day might 
be bullish. If institutional arbitrageurs have established the futures spread by being 
long the short-term futures and short the next series, then they will be buyers of 
stocks at the close of trading on expiration day. Additionally, if the only remaining 
arbitrage positions at expiration are short stocks versus long futures, then there might 
also be buying pressure at expiration. 
As might be expected, these events have not gone unnoticed and have caused 
some consternation among both regulators and traders. There have been accusations 
that some traders particularly those with foreknowledge of the block prints to come 
buy very cheap index options on the last afternoon of trading and then force those 
options to become profitable by selling their clients' portfolios in the manner 
described above. 
The strategist cannot be concerned with whether someone is acting irrationally 
or worse. Rather, he must decide how he will handle the situation should it occur. 
The key is to try to determine the direction that the market will move at the close of 
expiration day, if that is discernible. If futures have had a large premium for a long 
period of time, then one must assume that many hedgers have long stock versus short 
futures. Furthermore, even if futures subsequently trade below fair value, there will 
still be some hedgers who have stubbornly kept their positions, waiting to roll. The 
strategist should recognize that fact and take appropriate action late on the last day 
of trading: Don't establish bullish positions at that time and don't allow positions that 
are expiring that day to become too bullish. That is, if one is short puts and the index 
is trading near the striking price of the puts, then buy them back. 
Thus, the strategist must be aware of how the futures have traded during the 
last 3 months in order to determine how he will address his positions on the last day. 
Even with this information, there is no guarantee that one can exactly predict what 
will happen at expiration unless one is privy to the actual stock buy and sell orders. 
This order flow information is closely guarded and known only to the firms that will 
be executing the orders, generally on behalf of institutions. Consequently, it is a very 
risky strategy to attempt to apply this information for establishing positions on expi­
ration day itself. That is, if one expects stock buy orders at expiration, he might 
decide to buy some cheap, expiring calls for himself on the last afternoon of trading. 
Conversely, if he expects stock selling, he might buy puts. Given the fact that such 
movements are hard to predict, such aggressive strategies are not warranted.