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Strategies & Market Trends : Zeev's Turnips - No Politics -- Ignore unavailable to you. Want to Upgrade?

To: sq39 who wrote (11622)	12/8/2001 3:20:36 PM
From: mishedlo	Respond to of 99280

Lets assume there are tons of options on a stock called SZQ. 1/2 of them are strike 40 puts, 1/2 of them are strike 40 calls. Stock is at 40 and sitting. The option pits who sold those options are happy. They will all expire worthless. Now SZQ starts rising. It is up $2. Then $4. All of a sudden the guys that sold the calls are not very happy. The guys can not take the pain anymore. Their only recourse is to buy SZQ common, which pushes up the price of course but prevents further losses. Now they only collect premium on the puts which will expire worthless but they are covered on the call side by their common. Hedging, by going long, drove SZQ higher than it would have gone on its own accord. Reverse the scenario. SZQ is at 40 and starts dropping, well to protect their asses the put sellers start shorting. That is what I meant by the other way. If there are a huge number of puts on a stock and it breaks thru that level, additional shorting might sent it lower than where it was headed. So the big boys selling options like a sideways market cause they can collect both premiums. This happened all last summer. When the market is trending (or breaks out or down) the boys have to cover their asses and will hedge accordingly, collecting the option money on one side of the trade and trying to get as close as possible to break even on the other side. M