Hi David Lawrence; I believe your analysis that the high
call volume is due to deep pockets buying stock and selling
covered calls is correct.
You can tell whether the option market makers are long or
short an option by calculating the arbitrage that connects
call and put prices with the underlying security price.
For instance, the Apr 35 call has a lot of open interest,
much more than the put, for instance. I show prices of:
APR 35 Call: 3 1/4 x 3 3/8
APR 35 Put: 1 3/16 x 1 1/4
Stock: 37 1/4.
Long the call, short the put and short the stock costs: -1/16,
(i.e. it returns a positive amount), after spreads, but before
commisions, if held to expiration.
On the other hand, short the call, long the put, and long the
stock costs 1/4.
Therefore, the market makers are short the call or long the
put. But since the open interest in the call is so much larger
than the open interest in the put, it is highly likely that
they are short the call, as you suggested.
-- Carl |
