Does the seller of those calls have a vested interest in keeping down the price?
I would say yes.
Perhaps it depends on the purchasing power of the buyer vs the selling power of the seller.
I would think whoever sold you a huge block of strike 55 calls might have bought a bunch of QCOM at the same time for the ride (to protect himself). Now as the price gets towards 55, that buyer of QCOM has a lot of shares to unload, does he not?
If you want to buy more shares than he has to sell then I guess you would win. In the middle of a run I am sure you would always win. Too many people chasing too few shares with everyone wanting to hop on board.
Now at the end of a run with fewer people chasing and someone with a vested interest in seeing QCOM close at 55 or below, what happens?
One thing you are correct on for sure, is one can not make a precise determination based on # of calls or puts at a certain price. This is why I cautioned about over-emphasis on max pain.
Let's proceed, assuming you as fund manager sold covered calls, as a prelude to exiting your position, with one last chance for additional profit. If you sold a huge block of covered calls at a price, then someone has a vested interest in getting the shares as high as possible as that person (undoubtedly a big player) now owns that huge block of calls. If you wanted out of QCOM, you do not care, your QCOM is now gone and you collected the call premium as well. The option boys or institutional buyer of those calls is happy, cause they have the stock at a bargain price and will sell it off, presumably for a profit. In this case, the stock can close anywhere above 55 and it will look as if max pain failed when surely it did not.
Thus yes, I agree trying to predict a price based on number of calls or puts on a price in clearly not an exact science. I would be far more comfortable if I knew who the seller and buyer was of those calls.
If the call buyer was the average citizen, and the option boys were the sellers then we both know what happes (at least I hope we agree on this).
Any further comments?
If my reasoning is incorrect, I would sincerely appreciate your comments.
M |
