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Strategies & Market Trends : The Options Box
QQQ 624.28-0.2%Dec 8 4:00 PM EST
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To: jj_ who wrote (9315)1/31/2001 9:08:49 PM
From: dli  Read Replies (1) of 10876
 
First and foremost your post reveals a total lack of understanding of option pricing and market making.

Who's to keep the MM's from putting a $5 by $6 on a option and not moving it during a week of the underlying moving up because they know the next week they can reduce it on a stock pull back and a reduced delta.

Their survival instincts. If an MM attempted to do that he's capital would be gone in no time as such practice would open up riskless arbitrage opportunities especiall on multiple listed options. Also MMs always hedge their positions to stay delta neutral. They do not speculate on a stock's direction especially not a week out.

I had a option I bought at .625 go backwards to .375 as the stock moved from 74 to 82. I had 200 contracts and should have booked 20k-30k profits based on how the contracts were moving on Monday when I purchased them but on Tuesday all 5 exchanges had adjusted the contracts back 50% while the stock moved the other way. I said fk it and took a small loss but what I began to notice was the MM's are not moving the options with the underlying this month and when they do even a little they are using a big spreads of $1 minimum.

There's a few more factors than just the price of the underlying that determine an option's price. There's frequently very pronounced vertical volatility skews and far OTM options are usually most affected. So a volatility implosion as the underlying approaches the strike is nothing unusual. That's why it pays to run an option through a pricing model instead of just blindly purchasing it.

Dave
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