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

To: mishedlo who wrote (64070)	5/8/2002 3:42:28 PM
From: Softechie	Read Replies (2) \| Respond to of 99280

What if SEC probe on CRISCO accounting? What will happen?

To: mishedlo who wrote (64070)	5/8/2002 4:00:41 PM
From: stockid	Read Replies (1) \| Respond to of 99280

So are you short CSCO now that it blew by 15? Per your statement yesterday. SK

To: mishedlo who wrote (64070)	5/8/2002 4:12:14 PM
From: Lone Ranger	Respond to of 99280

mish, Excellent post. Like the way you're analyzing this. btw, iquatro says max pain is 55 for softie.

To: mishedlo who wrote (64070)	5/8/2002 8:23:51 PM
From: Carl R.	Respond to of 99280

I've written on this before, so I will try to keep this short. If life were perfect, the option writer would take a perfectly hedged position, i.e. short a call, long a put, and short the stock. Life is never perfect, so the option writer buys and sells stock to keep the delta zero. Tossing out some random numbers, lets say the option writer is short a call with a strike price at 60, and the stock is at 55. Let's further say that the delta is .50. Thus the option writer buys 50 shares to make his delta neutral. Let's say that the stock gaps up to 60, now the delta goes to .8, and the option writer is forced to buy an additional 25 shares. This causes the stock to continue in the direction of the gap up. Now let's say that time passes, and the stock is at 48. Since it is below the strike price, as time passes the delta slowly falls, and the option writer slowly sells shares to keep the delta zero. This is the action that tends to push the stock towards the MaxPain point. The assumption that they "make the most money if the MaxPain point is hit" is only correct if the option writer is writing naked options. If they are hedged with a neutral delta they make the same return regardless of what the stock does, unless if gaps one way or the other enough to make their hedge inadequate. Professional option writers are not gamblers, nor are they stock manipulators. They simply want a good return on their money with as little risk as possible. Carl