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To: KeepItSimple who wrote (83981)	11/12/1999 3:56:00 AM
From: GTC Trader	Respond to of 164684

KIS -- Does SI have a thread dedicated to playing this strategy? Perhaps a "Where the MMs make money on Options" thread where people can do their own calculations and compare with others. Is this feasible? What do you (and others) think? HB

To: KeepItSimple who wrote (83981)	11/12/1999 4:11:00 AM
From: Bilow	Read Replies (1) \| Respond to of 164684

Hi KeepItSimple; Re the market makers and manipulating option pricing. My conversations with ex CBOE options market makers leads me to believe that they go try to remain neutral on a stock. It's all about risk management and making the spread. If they end up with a net long position in options, after taking into account the deltas, they hedge this by carrying the correct number of shares short the stock. Everybody who uses the options market will exercise the options that are in the money at expiration, while leaving to expire the ones that are out of the money. This people do this is obvious, but what I mean to say is that the market makers are different from their customers only in the amount of commissions they have to pay. I have very little idea exactly why stocks tend to run to option pricing at expiration, but I can guess. A lot of people on the AMD thread talk about selling naked puts on AMD for income. When they get stock put to them, they then start selling covered calls. Small time players, who don't have big enough accounts to write naked options, end up buying options, but, since they don't have much in the way of funds, they almost never exercise. This activity illustrates the typical behaviour of options investors. So I can guess why stocks tend to trade at option strike prices... First of all, options that end up out of the money, do not effect the stock price. For the options that do end up in the money, they will effect the stock price only if the counterparties settle with stock, as opposed to the writer buying them back. A lot of people sell covered calls. When those end up in the money, their stock gets called away from them. The call exerciser (frequently a market maker, as options buyers usually sell them before expiration) ends up buying the stock. If the call buyer is a market maker, he then sells the stock to take his profit. This tends to push the price of the stock down. The people who buy puts frequently have the stock, and bought the puts as downside protection. If the puts end up in the money, they have to decide between selling the put back to the writer or exercising it. The reason that they bought puts to begin with is because they wanted to keep holding the stock, so most of them just sell the put back. The market makers end up with a pile of in the money puts. They exercise these, causing themselves to be short the stock. They then buy the stock back to cover, and this activity causes the stock price to move up. So if all the open interest in the option series for a stock was at just one strike price, you would have to expect the stock price to converge towards that strike value. Since series are usually a lot more complicated, they have to compute the max pain calculations. But overall, the effect is that if there are more calls in the money than puts, the stock is likely to go up, and contrariwise. -- Carl P.S. Your post would have been easier to read if you had turned off the "fixed" button when posting. It would be better if SI always defaulted to the other case.

To: KeepItSimple who wrote (83981)	11/12/1999 7:10:00 AM
From: craig crawford	Read Replies (1) \| Respond to of 164684

I've got a more novel approach. Howz abouts figuring out whether or not the stock is going higher and buy options accordingly, rather than worrying about a bunch of market makers conspiring to screw you and everyone else out of their money. If market makers are put on this earth to screw all of us little guys so those greedy bastards can all get rich... . .. ... .... ..... ...... ....... ........ ......... .......... ........... ............ ............. .............. ............... ................ ................. .................. ................... .................... ..................... ...................... ....................... ........................ ......................... .......................... ........................... ............................ ............................. .............................. ............................... ................................ ................................. .................................. ................................... .................................... ..................................... ...................................... ....................................... THEN QUIT YOUR TRADING AND BECOME A MARKET MAKER!!