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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: milo_morai who wrote (88804)	1/21/2000 7:31:00 PM
From: Petz	Read Replies (2) \| Respond to of 1573454

milo, re:<It's not the volume you should look at. Shouldn't you be looking at the Open Interest?> I think Gopher was implying that there shouldn't have been too much pressure from retail selling of call options because total call volume times 100 shares/contract was much lower than total trading volume. The truth is, both the selling of call options and a heavy open interest in "in the money" call options drives the price down on expiration day. Here's how. 1. Selling of call options. First, recognize that for every owner of a call option, there is someone who "wrote" the contract. Most of the writers of call contracts are professionals who try to remain somewhat "market neutral." That means that when you bought your call contract, the writer probably bought some shares of the stock so that he's "long" the stock and he is "short" the call option. So when you sell your call contract back to him (trades don't really get paired this way), he has to sell his stock to remain market neutral. When he does this, it drives the price of the stock down, because he'll probably just "hit the bid" on the stock. 2. A heavy open interest in "in the money" call options also puts pressure on the stock on expiration day. Actually, I was guilty of this today! I had 12 in-the-money (yet!) calls, but didn't want to just sell them after these drubbings so I decided to exercise them. But I couldn't afford 1200 shares, so I sold 200 of my current shares, so after Monday, I will own 1000 more shares of AMD. I created downward pressure too. Fortunately, this downward pressure tends to get reversed on the Monday after -- here's why. First, the lower price attracts more buyers and less sellers, so simple supply/demand drives the price back up. Second, call exercises get assigned on Monday. The people who wrote (sold) the 12 call options to me will suddenly lose 1200 shares of stock. They may want the stock back and they'll have to buy it. Or it may make them to be "short" when they don't want to be short, so they'll have to buy the stock back. THERE IS A HUGE STILL-OPEN INTEREST OF IN-THE-MONEY CALLS WHICH SHOULD DRIVE THE PRICE UP MONDAY I counted 50,000 open contracts equivalent to 5 million shares a strike prices of 35 and below. The volume in these in-the-money contracts was only 7000 today, so there could be anywhere from 43000 to 57000 contracts being exercised, resulting in the trasfer of 5 million shares of stock on Monday. Its possible that the open interset numbers at PBS and the CBOE are as of the opening yesterday, in which case there may be way less than 50K in-the-money contracts still open. Also, to the extent that these calls were written by professionals, they may have already hedged their exposure to the assignments coming Monday, causing less upward pressure Monday. Petz