<< Unless of course it was the specialist doing the buying [the April 40 calls].>> True. I indeed had this possibility written in my post, but erased it before submission because I wanted others to say about the specialist manipulating, which is very possible.
In general, the specialist could be forced to buy the calls at least at the bid that she set. You are right that the specialist would simply sell the stock short to cover (hedge) her risk. In fact, if the demand to sell April 40 calls could be high, the price should be lower; this demand could explain why the price of April 40 calls were lower as compared to that of April 65 calls (they have the same time premium as they have the same time to maturity).
<< The first is the share owner who wishes to hold his shares but does not wish to lose any nominal value. He sells covered April 40 calls.>> This explanation can be true in most instances, but not here because the value of doing so is close to zero as the proceeds from selling the stock rightaway is almost equal to the strike ($40) plus the call price, unless the stockholder has an emotional value for Yahoo!
My conclusion: The demand to write naked April 40 calls must have driven down the relative price of these calls; this amounts to my earlier discussion that the call writer is promoting these calls by offering a discount. The point you are adding to this is that the buyer could be the specialist who simply had to buy as she set the bid (which also explains the discount) and the specialist loses nothing from hedging. This hedging is called delta hedging (against falling prices) which is linear with price changes. But, there is another hedging called Gamma which is a hedging against falling option prices; this is approximately exponential; this means that if the call option prices keep falling, the specialist (buyer) must sell-short the stock at an exponentially (approx) larger rate -- this is "program trading." This could be nasty. But, at least as of Friday, this was not happening since (as I had noted in an earlier post), some of the call option values were rising despite a fall in the stock price. This could be partly due to an increase in Yahoo!'s volatility, compensating for the falling price. In any case, the program trading does not seem to have started; this will be there if the specialist wrote the calls and if the call prices keep falling (some call prices were down, though). Thinking all these, I was surmising that Yahoo! was not broken yet; it still has muscles. We will see.
Sankar |
