Dennis,
That's a long and complicated subject, so I'll just touch on a couple of points.
Open interest is the number of 100 share contracts currently outstanding. Everything is cleared through the OCC (Options Clearing Corporation). There are two ways to create a contract:
1) Someone want's to buy a contract (paying a premium), and someone else want's to write a contract (collecting the premium).
2) Someone wants to buy or sell a contract, and makes that transaction with someone who already holds that position and wants to exit.
I guess the OCC is responsible for matching buys and sells of existing contracts, and bringing in new contracts if there is an imbalance. It's the OCC that determines which brokerage is assessed exercised contracts, and the brokerage determins which client is assessed. It's supposed to be random...
You never exercise an option that is worthless. You always exercise in-the-money options at expiry. So, the writers of call contracts want the price of the underlying security to close below the strike price at expiry, so they wll expire worthless. The writers of put contracts want the shares to close above the strike price, so they again will expire worthless. Of course, the owners of those contracts want the exact opposite to occur.
Institutions tend to be big writers of contracts, since they tend to be holding large positions (long and short), and use the premium to average down their cost or create income. So, they can and do dumps shares or buy shares to push the price of the stock in one direction or the other to protect their open contract position. How many times have we seen it happen in USRX! |
