Here's the Options Industry Council FAQ on "weeklies":
http://www.888options.com/help/faq/weekly_options.jsp
This is a pilot program, involving some Exchange Traded Funds and a small number of equities, including Apple:
AAPL Apple Corporatin
AMZN Amazon.com Inc
BAC Bank of America Corp
BIDU Baidu, Inc.
BP British Petroleum
C Citigroup Equity
CSCO Cisco Systems Inc.
F Ford Motor Company
GE General Electric Company
GOOG Google Inc
GS Goldman Sachs Group, Inc.
MSFT Microsoft Corporation
NFLX NetFlix Inc.
In addition to the normal series of options which expire on a monthly basis with expirations from 3 months out to a year, and LEAPS, with expirations ranging out to years, some exchanges have started trading options that are issued on a Thursday and expire a week from the following Friday.
Presumably, the exchanges and regulators will be looking at the effect on markets to determine whether the pilot will be extended to other equities, modified, or abandoned.
There must be some extraordinary volume going into these options to create the "pinning".
Prior to the introduction of weeklies, the pinning effect was NOT universal. It happened some months on some equities, but not always. It only occurs when there are a large number of expiring near-the-money options and there is an imbalance that will tend to push the stock one way or the other toward a strike price. The low cost of the expiring options create the opportunity for quick, short-term profits.
Again, this is a normal phenomena that has been going on as long as listed options have existed. The difference is that there are now options expiring every week, rather than just monthly, so on those equities that have them there is the potential for this to happen every Friday, rather than just once a month.
The options themselves are NOT MARKET MANIPULATION. An option is nothing more than an "insurance contract" on the underlying equity. For a price, you've put off risk to another party for a limited period of time. There are a number of well-known mathematical principals that guide option pricing and their interaction with equity pricing, and the "pinning" phenomena is one of these. It's been well-known and understood for many years.
In general, the availability of options increases market stability. Indeed, it's the primary motivation for futures, which are similar to (but not the same as) options. Commodity futures help stabilize our commodities markets so that weekly fluctuations in the market price of say, corn, doesn't cause the price of corn flakes to also fluctuate wildly on a weekly basis, since Kellogg's has locked-in long-term prices using contracts.
Now, PERHAPS the introduction of weeklies has increased the incentive for some other form of market manipulation intended to reap profits from these new options. But I haven't seen any suggestion that this is happening, nor of what mechanism(s) might be used for such manipulation.
The short-term nature of these options means that they have little appeal or use to long-term investors. I am hard-pressed to think of a legitimate need that the weeklies serve. Given that, I do think that one can make a case that they serve no useful purpose and are disruptive to market structure.
I guess it depends on your view of the role and limits of market regulation. Should derivative products be permitted only when they have a positive effect on market stability? Or should the gummet keep their hands-off, and permit those that want to place bets to place whatever bets they'd like, and damn the fallout?
Personally, I am leaning toward the viewpoint that weeklies should not go forward from here. Before listed options were invented, options were individualized contracts. They expired when the two parties agreed they would expire. So there were no grand expiration times when large numbers of options would expire all at once, and pinning could not exist, UNLESS there were some reasons or conditions that would cause large numbers of hedgers to enter into contracts expiring at the same time. (This still could likely create potential for pinning at end-of-year (tax strategies), at quarterly earnings announcements, etc.
The listed option system was invented because they have a much lower overhead cost than individualized options, and because they facilitate a liquid market in options. I'd rather see the market go back toward the old system. With computers today, there's no reason why options can't have individualized expiration dates based on the individual needs of hedgers.
Conversion costs are now WAY lower than they were at the advent of listed options trading, because the fixed commission system on equities was abandoned many years ago, and transaction costs have steadily dropped since. At a half a penny a share or less for commissions, one could make an argument that there is no longer a need for trading options, and thus no longer a need for fixed expiration dates, and instead go to a system where every option transaction is a conversion.
