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

To: TimF who wrote (141875)	1/18/2002 3:31:20 PM
From: tejek	Read Replies (1) \| Respond to of 1584703

Tim, I don't know why I didn't do this from the get go. This is one of the articles I was talking about. Note the sentence that I have highlighted. ted ____________________________________________________ Know Your Options By James J. Cramer 01/17/2002 01:30 PM EST Options are pressuring stocks again, which leads me to tell, once again, what happens and why stocks get stuck at the strike. First, understand, this is abstruse stuff. I don't even attempt to talk about it on radio, and I would never go there on television. It is simply too complicated. But here we go again. When Intel (INTC:Nasdaq - news - commentary - research - analysis) reported, I was confident that it would be good but not good enough to break out of the orb of the strike. That's because there is so much open interest, so many bets placed around $35, that the sheer number of bets themselves can determine the action. Let's say you own the Intel January 35 calls. Those were the speculation of choice, the least amount of money with the most amount of upside, so thousands of these were bought. If you owned these, you very quickly realized that the stock didn't report a good enough quarter to break out. That leads to one of three decisions. First, you can sell the call outright. That puts pressure on the stock because anyone who buys these calls knows what you know and most likely would be using the call to hedge a short. That's the best use. You buy the call and you sell the common short against it. That's the pressure. Second, you could do nothing. They will probably go out worthless, and maybe you decide that you want to keep the lottery ticket. If the stock does get to $35, though, you might suddenly feel like selling the call to get something back. Hence, you will be back in the first cohort of people who are selling the call to someone who is hedging a short. Third, you could sell common short yourself and play the downside. That, again, puts pressure on the common stock, as risk-free short-sellers (that's what you are, you own the call) can really make a stock be heavy. So why doesn't the stock go down, then? Ahh, consider the fate of the Intel January 35 put holder. He, too, made the bet. This time his bet was a shortfall. When we didn't get the shortfall, he might have sold the put. The buyer might want to go buy common against the put to play the upside. That lifts the stock. Or, the put owner might hold it, but if the stock gravitates to the strike as others buy common against the puts, he might panic and sell it to get something back. Or he might just buy the common against the put and play the upside, rather than sell it outright. But it is possible that if the stock he buys against it rallies, he might sell the common to lock in a gain, or sell the January 35 call to lock in a gain. That sets up a situation where you have a risk-free sale of a call because your common stock is insured by the put. (Of course, the guy who owns the call and sells common stock against the call might also want to sell that January 35 put, to lock in a risk-free sale of a put because he is already short the common. I didn't say this was easy stuff!) Anyway, all of these different strategies have the effect of pushing the common stock toward the strike and then pinning it there because if it rallies too much above the strike, call sellers come in and if it sells off too far from the strike, put sellers come in. All in all, this process has an almost gravitational pull to keep a stock at its strike -- until expiration is over and the stock is free to trade up or down depending upon the fundamentals.