You are wrong. While there really is no market maker conspiricy, the
market maker conspiricy theory is a convenient way of explaining a
natural effect that options expiration has on the market. Keep in
mind that most options writers are not naked, they are arbitragers.
So, when I buy a call, the options maker buys the stock. When I sell
(or execute) the option, the options writer sells (or delivers) the
stock. The effect is the reverse with puts - the MM shorts the stock
until the position is closed, at which point he buys it. Since most
options positions are closed, not executed, the effect is to drive
the stock towards the level that is least profitable. Consider this
table of August ASND options expiration:
Stock Price Calls in Money Puts in Money
40 330 18918
45 1190 8924
50 4160 2267
55 10998 151
60 23298 0
Thus, if the price were above 55, the effect would be to cause the
execution of 23,298 calls, which causes the market makers to sell
2.3 million shares of stock, driving the stock down. Could the
stock rise above 60 and sustain it even against the sale of an extra
2.3million shares - yes if there was some really good news, but it
would be harder than in the absense of the sales.
Similarly, if the stock falls below 45, there are enough puts
outstanding to generate the purchases by MM of nearly 2 million
shares. Will this be enough to stem the tide of a total decay in
price? No, but it will sure help.
Thus, the net effect of August ASND options expiration will be to
support the price anytime it is below 50, and to hinder it anytime
it is above 50. Is it a conspiricy? No. It is a natural effect.
But whichever explanation you prefer, the effect is the same. And
the effect is real.
In real life, the situation isn't as clear as theory, of course. Of
course there are naked options writers. There are also people who
will close out their August Options and roll into some other
expiration. And so on. But the effect is still noticable, and it
seems to be convenient for most people to view it as a conspiricy,
and it helps them to remember how the effect works. So when someone
trys to explain the effect by the conspiricy theory, let them have
their memory tool.
Good luck,
Carl |
