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Technology Stocks : Dell Technologies Inc.
DELL 138.22-1.6%Dec 9 3:59 PM EST
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To: Dorine Essey who wrote (127543)5/21/1999 7:06:00 AM
From: Frank E W  Read Replies (1) of 176387
 
Hi Dorine ..somthing a friend sent me on DELLs stock price

This is from the guy whose postings I most respect on our board. He's one of
the reasonable ones who doesn't go off the deep end on either side of Dell.
They were talking back and forth about MMs and how they affect the market.
Someone had posted that there was no way MMs could manipulate the prices of
these large stocks and this was his response. It probably makes more sense
to you than it does to me :))

Believe it or not there are things you may not understand.

There is a natural pinning action created by moneyflows that result from the
unwinding of options positions. Ultimately, a lot of the hedging done by big
players works its way back to the stock such that large open interest at a
given strike (over 100k contracts on Dell 40 calls open as of yesterday
anyway) creates money flow resulting from closing positions that makes it
difficult for the stock to move much past that strike.

Let's look at an example. it involves some complex assumptions. James Cramer
of STreet.com among others would essentially agree with me on this:

Suppose there is massive open interest on Dell 40 calls for May. And suppose
the public (largely unhedged) is mainly long those calls. I don't know for a
fact that this is the case, but let's just suppose for the sake of
discussion...and I think this is likely.

Now the big players are probably more hedged, net net. that means the market
makers are likely short the 40 calls...which means, ultimately there's a good
chance they are long the stock as a hedge. They are catching the spread and
eating the premium as it decays (implied volatility was as high as 111 and
has now shrunk back to about half that (57ish)...now this likely means that
where there WAS great DEMAND to go long those calls, the public is now
dumping these calls...that's why the MM's make them cheaper...because they
are now buying them back...they made them expensive when there was great
demand, and now that there's more supply than demand these calls get cheaper.
Just like any other commodity.

SO...
the MM is now buying the calls back...and selling the stock to unwind the
hedge. The stock is being sold on size, which drives the price
down...further deflating the price on the calls...which the little guy is
mainly long.

I have seen this happen a HUGE # of times on Dell into expiration...esp. on
those expirations that immediately follow earnings releases.

I was (and I know this is after the fact, so I get no pat on the back for
it..in fact I kick myself for not acting on what I noticed here) aware of
this going into earnings and this is what I was thinking.

Hmmm. 100k contracts open. the stock price isn't moving. If those in the
KNOW know that Dell is going to do well, they would have moved the price of
the stock up before the public had a chance to go long the calls. They would
have pumped the price on light volume which would have made it harder to buy
the calls on the cheap.

But the stock sat there. Didn't run much...as 100k contracts were
open...which meant the MM's were selling the calls (probably), and buying the
stock...and even that extra infusion of "artificial" demand for the stock did
not cause a big run up.

I should have paid attention to this. But I made a mistake.

No conspiracy theory. Just natural forces in the market...and maybe a little
bit of the big boys and their network...and how it affects the little guys.
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