Net Perceptions, Inc. (NETP) Message Board

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Technology Stocks : Net Perceptions, Inc. (NETP)

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To: rupert1 who wrote (2710)	8/15/2000 11:38:13 PM
From: Carl R.	Read Replies (1) of 2908

Re: Max Pain point The Max Pain point is the point at which the most options expire worthless. In order to understand how options tend to behave near expiration it is a useful memory tool for some people to imagine a malevolent market maker deliberately driving the stock price to the max pain point in order to cheat option players out of their profits. The real cause is that options markets are made by professional option writers who normally eschew risk and hedge themselves. What happens is this: You buy a call, he sells it, but then to protect himself he buys sufficient stock to keep the beta as close to zero as possible. If the option is in the money, then as expiration approaches the beta approaches 1, so the option writers long holding equals the call position. When you sell the call to take profits he sells the stock, driving the stock down. Conversely when someone sells a put in the money it drives the stock upwards as the option writer closes a short position. The net result is that as people sell options that are in the money it pushes the stock to the max pain point. Carl

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