Hi Doug,
RE: <<< This is a game. Just gotta know the rules and the players. >>>
Couldn't agree more. But along these lines, one of the rules---maybe commandments----of the market (roughly 80% of the time anyway) is
Options Traders Shall Be Losers!
and, of course, one of the many ways to bring this about is by doing whatever it takes to get as many contracts as possible to expire worthless.
In the case of BRCM, right now there are 17,468 open calls, and 7,655 open puts for a put/call ratio of 0.4. Of these, 4,165 call contracts and 780 put contracts are in the money, while a whopping 13,303 calls and 6,875 puts are out of the money. Expressed another way, the in-the-money put/call ratio is about 0.2, while the out-of-the-money put/call ratio is 0.5. But also this means that as the stock moves up, more calls will be in the money than puts.
There are a total of 4,782 calls which are currently out-of-the-money at strikes of 170, 175, and 180. On the downside, there are 2,182 puts which are currently out of the money at strikes of 165, 160, 155, and 150.
Taking the number of contracts which are in-the-money, less contracts which go out-of-the-money, and summing these as price movement in the stock occurs, here's what happens to the number of contracts (i.e., total number of puts and calls) which will go in the money as the stock price moves up:
170: 1,697 more contracts ITM
175: 2,680 more contracts ITM
180: 4,233 more contracts ITM
As the stock moves down, here's what happens:
165: 381 more contracts ITM
160: 739 more contracts ITM
155: 673 more contracts ITM
150: 286 more contracts ITM
Now, it is still 4 weeks to expiration for July contracts, and put/call open interest changes all the time. Also, only July contracts are considered here, so this is a somewhat myopic view no doubt. Still, from this admittedly static viewpoint, there is clearly far more resistance to BRCM going up than there is to BRCM going down. If BRCM can get to expiration at a price of 150, then only 286 total (puts and calls) more contracts will NOT expire worthless. OTOH, if BRCM hits expiration trading at 180, 4,253 more contracts will NOT expire worthless. And, somebody must pay. Those who sold these contracts in the first place will certainly not want to.
Interestingly, in the numbers above, there looks to be pretty strong resistance for an upside move at the 175-180 level, and pretty strong support at 150. The extremes of the 10 day Bollinger bands stand at 180 and 140. BRCM's price is only 15 away from the upper BB, while it is 25 away from the lower BB:
askresearch.com
If you believe that one of the main jobs of the sharks in the pits at the CBOE is to get as many contracts to expire worthless as possible, then it is clear what they have to do to accomplish this.
Now, I realize there are other factors to consider here, including the fact that the premiums asked for calls are generally greater than the premiums asked for puts. So, one call does not equal in dollar terms what one put does. In the case of BRCM for example, the ask on a call which is $5 out of the money is 14 1/4, while the ask on a put which is $5 out of the money is 13 1/4. And these discrepancies are affected by the stock momentum and trend. Also, the options players have varying motivations; someone selling huge blocks of calls will have one motivation, while this will tend to be opposed by another who is selling huge blocks of puts. Also, those who sold these contracts in the first place might have closed their positions long ago, and the contracts sold and resold since then by others. Obviously, alot hinges on just who these guys are, and how much clout they have relative to one another.
I happen to be long BRCM, but it would not surprise me to see some consolidation in the next week or two, and given that there's not a lot of short interest (3.1% of float), I would not be surprised to see the stock driven down some in the next few weeks by those who are adept at doing so.
And, if the boys in the pits can't drive the price down enough, might we be subjected to a downgrade, with yet another analyst bashing BRCM's valuation soon???
Just my $0.02 worth..........
WS |
