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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Joseph Silent who wrote (83408)	9/20/2002 9:10:54 AM
From: Cynic 2005	Read Replies (1) \| Respond to of 99985

Several dealers sell naked options. That is, without owning the common, they will sell (naked) calls especially when the stock is trading at or near the strike-price. That way they try to grab some of the time premium. When the stock start moving away from their bet (in this case, up), they have to buy (or sell if you sold naked puts) the stock to deliver the stock if it gets called. Net effect is that there will keep going up (or down for puts) until all the naked option covenants are met - without regard to fundamentals. This phenomenon happens mostly near options expiration days. I read somewhere that delta-hedging was partly to blame for the crash of 1987, which happened a day after the options expired. Hope this is clear.