Jack and all:
I have recently posted a series of notes here from a person calling himself CatsklPubs on the AOL Board. There appears to be some confusion in the minds of some of you between me and him. Please reread my previous posts and understand that I am not him. He is not me. We are NOT the same person.
I have only reprinted some of his thoughts here to provoke comment and stimulate discussion on this board. This has certainly happened.
All - Please take note. I do NOT trade like Catskl and did NOT make 2 million last year (wish I did) and lose 300k last week. Like many of you, I am simply trying to learn about this topic and am curious about the various points of view and explanations I read here regarding short term moves in INTC and it's options. Fascinating stuff.
In response to these postings, I have received an interesting e-mail from a SI Board reader who describes himself as a "former market maker" in Intel options. He wishes to remain anonymous and has given me permission to reprint his comments. I share his insights here in the hopes of bringing balance to this topic.
I realize that not all here are interested, but for those who are, enjoy:
<<Please don't put my name into an SI thread, but I thought I'd set you straight on INTC and that idiot "Catskil" on AOL.
I see you've got a quality education so I'll explain with no watering
down.
First off, I used to be a floor options market maker. Now I trade from home.
Options market makers on the floor (the ones who probably actually sold Catskil his Intel options) are what is known as "short term arbs"
(arbitraguers). They don't like undue risk and they do everything to
avoid taking it home with them.
Catskil buys a call from them. They are now short the call. In the
next seconds (or even before, if the are anticipating) the market makers buy INTC, the stock. They have cancelled the negative delta of their short INTC call, with the positive delta of INTC, the stock. They don't buy in 1:1 ratio, but rather dependent on what the delta of the particular INTC call is at the time. Delta is the first derivative of option price as a function of stock price (all other independent variables held constant).
When the option market maker hedges the INTC call he just sold, the
stock market maker in INTC (a NASDAQ broker-dealer) now has a bid,
frequently an "at the market" bid, which he either fills immediately, or if he thinks the stock is going to run-up, he fades and fills at a
higher price.
In this fashion, options purchasers like Catskil are just leveraged
stock purchasers. Similarly, if some trader at a large player (Solomon, Lehman) thinks INTC is due for a short term fall he might sell naked calls into the market, collecting the premium. The market makers buy the calls and then immediately sell INTC short to hedge their newly acquired bull-exposure. And so Lehman's options play immediately affects the NASDAQ broker-dealers' quote on INTC by pushing it down.
The overall situation is that manipulation on a large, liquid, stock
like INTC is virtually impossible. Every options play is almost
immediately reflected in the stocks price. The options market makers
are making a killing off their bid/ask spread on the options; they have little reason to attempt a manipulation and every reason not to, because this would put them in a "directional play" which is the antithesis of how they make their money on a liquid stock.
INTC sold off on earnings in exactly the same manner many high-flying
techs have been selling off on good earnings this year (most recently
CHPS) : there is large amounts of speculative money in the stock which
is nervous about losing its profits. Any event which occurs which gives rise to fears that additional new money will not come into the stock at the preceding pace is looked on as these speculators as a sign to get out with their profits now. In INTC's case the 'event' was their warning that the extraordinary pace of their growth cannot continue at quite the same level.
I have stood in the INTC options pit and traded during the most volatile of times. The market makers have no clue where the stock is going , up or down , and they could care less. They are arbing short-term profits out the order flow and avoiding directional risk at all costs. Most times they don't even know what news has got the stock moving. They are too busy concentrating on which direction the next big order is going to walk into the pit from.
Catskil is the greedy one. Or, since in my opinion, every single person in the stock market is greedy, Catskil is the foolish one. He had enourmous gains and failed to see the writing on the wall that not
everyone was going to sit on their profits forever. He got beaten fair and square by other traders at all levels (private investors as well as big hedge funds or I-Banks as well as myself) who correctly felt that the risk on the INTC earnings' announcement was more towards the downside, not the upside. Nothing goes up forever without bouts of profit taking.
Catskil is a pathetic little crybaby who doesn't even have the dignity
to admit he got beaten; his manipulation theories are just the kind of
crap AOL readers will lap up. I hope you are more intelligent.
Please purchase Hull & White's text on derivative securities, read the
major chapters, and come to an understanding of what is really going on before posting nonsense like Catskil's garbage.>> |
