Ben,
Thanks for your help. Darren is is from the site:
There is a Wall Street axiom that says "90% of all the options that are bought expire worthless". This means that 90% of the time the people who 'write' the option and collect the premium, never get their stock 'called' from them or get stock 'put' to them.
This has also been called the theory of maximum pain or just Max-Pain, for short.
There has been some analysis of this hypothesis in the Silicon Investor, Trading IOMEGA based on technical analysis , thread. There are also extensive discussions of this effect, also called 'strike price pegging', in the archives of both Jim Cramer's "Wrong!" column and the "Saturday Options School" column at thestreet.com
By looking at the price of the underlying issue, on the day before option expiry, (Note: options expire on the third Saturday of the month, hence the day before expiry is the third Friday of the month) it has been seen, with statistical significance, that the closing price tends toward the price that forces the greatest number of options to expire in a worthless condition.
Whether this tendency is deliberately caused by some conscious effort at market manipulation or is just a result of some natural law of supply and demand is not obvious to this analyst. It is significant, however, to be aware that this does seem to be a tendency that occurs during those times when there is not some major market upheaval, price momentum, or breaking news relative to the stock in question.
Hopefully, earnings momentum will eclipse this effect this month.
Kent |
