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Technology Stocks : Dell Technologies Inc.
DELL 129.98-6.2%Dec 12 9:30 AM EST
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To: Eddie Kim who wrote (72830)10/18/1998 3:28:00 PM
From: Chuzzlewit  Read Replies (2) of 176387
 
Eddie, I understand what you are saying. But it is my understanding that for the majority of options to expire worthless that the price of the underlying stock ought not to move, or to move minimally. Doesn't that mean that market makers would be net sellers of both puts and calls and have a neutral position? So the presumption is that the price of the stock has moved substantially at the end of the period, which would require the market makers to either sell a lot of stock short, or to go long -- both ideas with the purpose of affecting a large change in the stock price. So we come back to my original question: how can you do it profitably? Please use real numbers if possible.

Let me illustrate my quandry with a hypothetical example: suppose a market maker sold puts for $3 and and an equal number of calls for $3 for a strike price of $55 when the price of the stock was $55. If the price of the stock moved to $61 at expiry the value of the call would be $6 and the put would be worthless. But since you had received premia of $6 your position would be break-even. Similarly, a price of $49 would achieve a break-even position. The maximum profit point would be if the stock closed at $55. Now suppose the price of the stock moved to $62. How do the market makers engineer a drop in price of roughly $2 and make a profit? If they sell sufficient stock short to effect that drop they must eventually cover which drives the price back up. It would also imply that major volume moves in the stock occur after options expire.

What am I missing here?

TTFN,
CTC
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