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Strategies & Market Trends : Tech Stock Options

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To: donald sew who wrote (55219)	10/11/1998 6:01:00 PM
From: Heg Heg	of 58727

Hi Don, long time no post from me. Just lurking. First let me thank you for your outstanding work you are sharing with us on SI. Next let me comment on your question regarding the OI: You may remember that last year I undertook a study to evaluate where the various 'optimal' price points for option expiration would be; optimal according to various ideas and what effect -if any- they had on the price at expiry: the least number of options in the money was one of those ideas; the least amount of payout from option writers (=max pain for option buyers) is another. The results were rather an anticlimax: Statistically I did NOT find a significant influence on the price at expiry, the price fluctuations and in particular the directions in which the price moved could be explained by random moves. That is not to say that the price never moved in the right direction, just that it quite often also moved in the wrong direction - if manipulation was at work THERE i would expect a more consistent picture. The conclusions I have drawn from this is that the majority of option writers is likely covered or otherwise hedged, probably delta-neutral (as worked out by Black-Scholes). Delta-neutral strategies stipulate that options written are covered partially according to the statistical risk for the particular option - which has mainly to do with volatility. The 'delta' is a part of the formula to calculate the options price according to Black-Scholes. So when the stock or index price moves, the writer has to adjust his cover - either buy or sell an appropriate number of shares or index equivalents. Black-Scholes work implied that IF they can do this continuously (stay delta-neutral without tracking error) their risk is ZERO and their reward is the premium collected minus the expenses and slippage incurred in the effort to stay delta-neutral. The upshot of this is that these guys DO NOT have to worry or care about where the price ends up at expiry, their only worry is to stay neutral during all these violent swings. Their biggest concerns could be market shutdowns and big gaps because they would incur big slippage and 'tracking errors' at those instances. Of the three 'conspiracy ideas' i evaluated none had significant impact, however the 'least number of contracts in the money' performed slightly better than the other two. This surprised me somewhat, because it made the least amount of sense - if option writers were manipulating the market the amount of $$$ they have to pay out should matter far more to them than the number of contracts in the money. (The two can differ if the options-oi is not symmetrically distributed around the 'optimal' price). The conclusion I drew from this is that it is the most widely followed 'conspiracy idea' and the expectation of its followers has an impact on the market - self fulfilling prophecy. On a different issue: I have (without quantification) also noticed that lately during X-week there can be some remarkably QUIET days which would mainly hurt option buyers via the fast deterioration of time-premium. Thats all. Regards (and a big thank for your work) Heg

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