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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: Paul Viapiano who wrote (1928)	7/17/1999 12:49:00 PM
From: -	Respond to of 18137

Interesting piece from Cramer (www.thestreet.com) this morning, about why stocks tend to go out at their strike (text below). If you're interested, thestreet.com has a new half-hour TV show for traders/investors which runs on the Fox News channel (carried on most cable systems). The pilot show was supposed to run early this morning, but due to the Kennedy story coverage, they are going to run it later today... so you can still catch it (it runs on Sunday too). Details at URL above. Cramer has obviously had his headaches/difficulties with CNBC in the past, it looks like his answer is to compete! -Steve ============ Most people expect stocks to go out around their strikes. The reason for that "pinning" is because people who are long calls sell them to make a little money and people who are long puts sell them to try to recover a little money. Collectively that action forces a stock to gravitate toward its strike. Why does that happen? It helps tremendously if you think of what the other guy, the buyer of your merchandise, can do with it. If you sell a call to someone on the day of expiration, the most likely thing that person will do with it is to short common stock. This is not a bad trade. Let's walk through it. You own a call on Microsoft and nothing is happening to the stock. It is at 95.5. I might be willing to buy that call from you on the Friday of expiration and short the common stock underneath it. That way, if MSFT suddenly crumbles, I have a risk-free short. If it goes up, big deal, I am out almost nothing. Hold it, before you think, what is Cramer smoking, I can tell you that I have done that trade probably several thousand times and it has made me money about 60% of the time. How about the puts? The stock is at 95.5 and you own the July 95 put. You sell it to me; I then go and buy the common stock because I now have a risk-free shot to the upside. Again, this is not a silly trade. If I can trade cheaply, I might buy the put, buy the common stock and then sell the July 95 call that goes out at the end of the day for a buck. I might be able to pick up $1 in premium in the call even as I may lose pocket change on the put. The important thing to understand is that all of this activity does tend to create a balance around the strike, which is why so often things get pinned there. As people are well aware of this pattern, they may have been tempted in the last few days to short a huge number of MSFT July 95 calls for a dollar and change, betting that the calls will go out worthless. Others might have sold those calls months ago to bring in income and never expected the stock to get there. They did not bring them in earlier because they had conviction that they would never have to buy them back. ==========