Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Micron Only Forum -- Ignore unavailable to you. Want to Upgrade?

To: Bipin Prasad who wrote (49295)	10/15/1999 11:50:00 AM
From: John Graybill	Read Replies (1) \| Respond to of 53903

The big institutions are generally writers of options rather than buyers, so their intention is to sell the option early in the cycle and get at least the time value, and buy it back at expiration. The best return, of course, comes when the option expires worthless. I once worked out the odds that MU could close within 1/8 of a strike price 90% of the time over a three-year period, if it were just chance, and it's incalculable with an 8-digit calculator. My explanation, the cynical one, is that the touting and short-term buying and selling at the end of the cycle (as I mentioned earlier with Whittington and BofA) serves that purpose. The other explanation is that it's a result of the guys on the floor who must hedge themselves when the initial option deal goes through. BTW and FWIW, this is a transcript of one of CNBC's "Ask the Touts" segments at 10:44, courtesy of the TV Eyes folks: >>What did [is?] you are [your?] short and long-term micron technology, please. >> Short-term, again very positive. This is a leverage plate [play?] d-ram pricing, they are going through the roof right now. And micron is low cost provider so in short-term positive. Now this going to be a bouncey investment he [here?] so be careful with this one longer term. Liz: Dave, thank you liz: We've been speaking with dave brady, portfolio manager for the stein roe large-company focus fund. If you want more of dave's exclusive stock picks, go to cnbc.Com at www.Cnbc.Com. (MU high for the day 69 13/16, go boys go!)

To: Bipin Prasad who wrote (49295)	10/16/1999 8:32:00 AM
From: Carl R.	Read Replies (1) \| Respond to of 53903

I have written extensively before on the reasons for the options expirations effect, and there is no point doing it again. Some prefer to envision a massive conspiracy to push the stock price to the point at which the most options are worthless. This isn't the methodology, but does work as a handy memory tool to understand what to expect, and accurately describes the effect if not the cause. What is the real cause? It is a simple, natural, understandable effect of people unwinding their options positions as expiration approaches. First you have to understand that most options are written by people who hedge their positions, and that therefore as people unwind their positions, the writer unwinds the hedge. Thus if you are long MU 70 puts, the option writer is short some stock to offset the risk. If you sell the put (because it is in the money), he buys the stock because he no longer needs the hedge. His stock purchases tend to increase the price of the stock. As it approaches 70, you stop selling puts, and he stops buying stock. There are other factors at work, such as the decaying time premium, and the fact that as expiration gets closer the Beta goes to 1 for in the money options and to 0 for out of the money options. All of these factors work together to push the stock towards the point at which the most options are worthless, or at least towards a nearby strike price. The effect can be overpowered by fundamentals, of course, though it always has the effect of trying to push the stock towards a strike price. The magnitude of the effect is determined by how many options are outstanding. Carl