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

To: tejek who wrote (98777)	3/17/2000 1:14:00 AM
From: Petz	Read Replies (5) \| Respond to of 1570917

ted, re: max pain theory -- does it work? First, a simple definition. The MAX PAIN POINT for a stock is the price at which the value of all expiring option contracts is minimized. In other words, its the point which causes the MOST PAIN for the option holders (put holders and call holders). THere's no question that as long as there are more in the money calls outstanding than the number of in the money puts, there will be downward pressure on the stock. The degree of downward pressure depends on how many MORE in-the-money CALLS there are compared to the in-the-money PUTS. You take that difference, multiply by 100 and compare the result to the daily trading volume of the stock. For example, checking dreyfus, at a price of 49.xx, AMD has about 15,000 call options outstanding which are "in the money." There are only 1,700 put options "in the money." The difference represents 1.33 million shares of stock. There are 1.33 million more shares of stock controlled by in-the-money CALL options than the number of shares of stock controlled by i.t.m. PUT options. Since there is NEGATIVE time premium on most of these puts and calls, some people will decide to exercise their in the money calls and sell stock at market, rather than sell the expiring call option at the bid price. Thus, there could be as much as 1.33 million more sell orders vs. buy orders, if every in-the-money call holder decided to exercise and sell on Friday. You might ask, what if the people holding the calls really want the stock? They'll exercise and not sell. This is most likely to happen with deep in the money calls and puts. Therefore, it makes sense to discount the effect of any calls or puts that are more than, say, 20% in the money. Looking at the option table, about 4000 of the calls fall in this category, so now there's 0.93 million shares of downward pressure. Another portion of these 0.93 million will just sell their call options to the market-maker and ignore the 1/8 better they might have done by exercising and selling. Many will exercise but not sell until Monday, if their broker lets them get away with it. So the real pressure on the stock is much less than the theoretical maximum. Also, some arbitrageurs look for option related selling and buy the stock, hoping for a quick rebound. The original question was, has anyone tried to validate the max-pain-point pressure theory over a long period of time? I'm sure 10 PHD theses were written on it, but I don't have any handy to reference! The NYSE did a study a while back to see whether stock closing prices on expiration Friday tended to be closer to option strike prices than average. As I recall, the answer was, YES, but not a whole lot. AMD seems to be an exception to that general rule, probably because there are always lots of option players with AMD. BTW, IF there is a big drop because of option activity on Friday, theory says that it should be mostly reversed on Monday. But if the whole market appears sick because of the option activity, a blue Friday is often followed by a blue Monday as well. Sorry for the extremely long explanation, I thought a few people might be interested. One final thing on AMD. THere WILL be extreme pressure tomorrow to cap AMD at 50, since there is a huge open interest in the 50 calls (11,000 contracts, representing 1.1 million shares). So there's about twice as much downward pressure if the price is above 50 than there is if the price stays below 50. Petz

To: tejek who wrote (98777)	3/17/2000 10:09:00 AM
From: Tony Viola	Read Replies (2) \| Respond to of 1570917

FWIW, and a sample of only one, INTC has ignored the max pain analysis the last few months (went up when it should have gone down). At other times, I have seen INTC, and others, "obey" the thing more. Tony