My initial explanation was oversimplified for ease of understanding. As I said in my later post the process is an ongoing one. When an option is closed (i.e. bought back) that causes the number of shares needed to decrease. But as time passes, less shares are needed to cover out-of-the-money calls as they decline in value. Also, for example, if volitility decreases, less shares are needed. Really the computer does all the work. No human could compute the number of shares required fast enough. As I said, if the stock goes up, more shares are needed.
If the shares fall, less are needed. And of course when some expire worthless, less shares are needed, but they don't just go from needed to not-needed. The closer you get to expiration, and the further out of the money the shares are, the less shares you need. For example at this point, not many shares are needed to cover an Aug. 60. How far do you think the stock would have to go up tomorrow in order for them to be worth $1? I don't do the actual calculations, but flying by the seat of the pants I'd say that the stock would have to go up $3 for the option to go up 1/16, and if so then only 2 shares would be needed to cover each contract. Thus the number of shares has been slowly declining. This over time drives the stock down (unless other factors drive it up, of course.) But it doesn't just happen at once.
Anyway, it all works together to create the effect that we all know of as the market-maker-conspiricy effect.
Happy investing,
Carl |
