Aj, you might be interested in this.
It is my reply to someone who questioned my example of CSCO not having a chance at 20 with all the CALLS on it at that price.
Try looking at that from the perspective of the writers of those options. Their view is not optimistic. It's the buyers who are using the calls as bets that are optimistic, and they have just about the worst track record there is. Those collecting premiums and hedging long positions are not giving off positive vibes. They're betting down.
I disagree:
The writers are not betting down (per say), they are selling options. No more, no less. (I am talking about the institutional writers not consumer writers who play a minor role in the option writing process).
If people want to buy CALLs the institutional writers will sell them.
If people want to buy PUTS the institutional writers will sell those.
Maybe a few consumers are writing naked puts or naked calls but I doubt that volume is big compare to institutional writing and consumer buying.
Thus: writing of options has nothing to do with the writers being bearish vs bullish. They are making a market. If people want to buy puts, they write puts. If people want to buy calls, they write calls.
I contend that if there were 120000 puts and 120000 calls both on CSCO, the stock would not have budged at all. The wrtiters would have tried damn hard to pin CSCO to 20 to make both sets of options go up in smoke. Instead there were a huge number of calls vs puts at both 20 and 17 1/2. Boom, fall to 17 1/2. In a sideways market, this crap happens all the time.
The writers are just making a market. But.... In the end, they do best to make sure they win win that bet. They do not care whether the consumer buys calls or puts, they HAVE to take the opposite side of that coin in order to make the market. They are not being bearish by writing calls. The BUYER is being bullish by betting hugely on good news from CSCO.
In March, people have bet hugely down as noted by the Put/Call ratios.
Now, there are three options for the institutional writers (who seldom lose).
1) Short the crap out of the market and let things fall. There is little attempt by the "powers that be" to stop the slide, and/or foreign investors start pulling massively out at the wrong time. Delta hedging could sink us below the Sept bottom in this scenario, as people would likely be buying puts all the way down, and the sellers of those puts would have no real option other than shorting to protect themselves. All calls are totally smoked.
2) Cause a rally and make that put interest go up in smoke.
3) A very very nice combination of both 1 and 2. Sell at the top (already accomplished last week or even earlier on many many stocks), Let the market "bottom" the lower the better, but reverses quickly, with enogh time for a March rally. They accumulate enough shares at the botttom to cover the calls that come back in the money on the way back up. This will also smoke all those huge #'s of puts that people have been buying for the last month or two. If way too many calls are bought on the way back up, the rally could stall sooner than expected.
One can make a reasonable case for 1 and 3, and even a case for 2 I suppose but many other indicators point to #2 being the least likely.
As for #1 vs #3, one just has to watch for the signals, and make the appropriate decisions. Nunber 3, my favorite scenario, calls for the "quick drop" and fast rebound. It is by no means guaranteed.
M |
