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Technology Stocks : Semi Equipment Analysis

SOXX 292.04

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4:00 PM EST

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To: Jerome who wrote (31387)	7/18/2006 10:46:01 AM
From: Ira Player	Read Replies (1) of 95610

Jerome, It is oversimplifying the option open interest to assume it represents it's face value. You do not have information on any hedging that is happening behind the scenes. A person taking a position in an option contract is making an unhedged 'bet' on the market. Often, the other side is taking the order, but hedges the position to 'eliminate' (read that reduce) market risk. For example, when a Market Maker gets an order to "Sell XXX Puts", he is probably not already short XXX puts, but he wants to buy them at the bid in order to capture the bid/ask spread since that is his primary business. When he buys the puts to complete the order, he will simultaneously buy the number of shares to make him "Delta Neutral". If the market drops, the puts gain in value and the shares lose a similar amount. He fully hedges his position so short term market changes do not effect him. In this example, the number of put option open interest rises by XXX, but the unhedged position that created the open interest is bullish, not bearish. We don't have enough information to interpret open interest as an indicator. Ira

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