Play on puts expiring on Friday--
James-- Only below 1485 on NDX - if you are seeing SPZ selling off try to play--but this is a great post PM sent to me- I will request the gentleman to write on this thread directly but anyway this is a possible play-- since this a private message I maintain the privacy- my only point is if this is a common knowledge that the trap and surprise factor just disappears--
Wednesday, Nov 18 1998 5:32PM ET
Hello Ike,
I've checked the Open interest on other bell weather stocks. The story is the same as the major indexes. The puts are weak in most are worthless but the calls is where we could see some concern for the Market Makers. (Almost the reverse of Aug & Sept expiration where the Market Makers ran up the market because there where too many puts in the money).
I noticed that todays rally was not very broad based in my opinion. The Advance and Decline on most mkts was fairly even but the up volume was significantly higher than the down volume (specially in the compx). New highs were a modest 54 compare to 31 new lows. So it won't be very difficult for the Market Makers to start a sell off. I can see that the MM didn't want to start the sell off too early and increase the Open Interest of the Puts that are in the money. Todays trading provided a feel good higher close to bring more 'sheep' into the market so the MM can sell to the sheep at the top and do a 'bhumbo'? job on them <ggg>.
I think the money waiting on the side lines, would welcome a nice pullback to buy into. Thurs is also the start of impeachment hearings so what better excuse for the MM to do some profit taking, sell off their longs (the sheep will follow) and then the MM will buy it back after the expiration period.
Also, the puts expiring on Fri are cheap; premium is almost gone (feel good 54+ point close) ie. ibm Nov 155 selling for 3/8 Nov 160 1 5/8. Now the money to pay out on all the CALLS if ibm closes at 158 on Friday is going to be significant compare to having ibm close at 155 or less. I think using a bit of our profits to play the Nov 160 might be worth a trade. I find it hard to believe that these savvy MM are going to close IBM at the highs and willingly payout all the calls in equities and index options.
For equity puts candidates, I would look at bell weather issues trading near their recent highs and which have high open interest in the November Calls. For the index options, I would look at the closes out of the money strike price.
Some may say that option writers hedge their exposure with the futures, stock, and complex derivatives. Well regardless how they hedge, they'll make more money by having to pay off the least number of calls as possible. Puts are almost all dead <g>.
If the Market Makers finish the market at the highs then we can find comfort in knowing they are going to lose a lot more money than us with our 10% profit put play. I agree with you, we have to play to contrarian approach. If we have a morning rally tomorrow, then that'll be a nice time to initiate the puts which expire the next day.
Well, that's my trading idea for tomorrow.
Regards, |
