Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Advanced Micro Devices - Moderated (AMD) -- Ignore unavailable to you. Want to Upgrade?

To: Milan Shah who wrote (221839)	12/30/2006 11:20:53 PM
From: Magrathea	Read Replies (3) \| Respond to of 275872

I'll discuss any alternate theories that fit the data. How does writing a put constitute a cover? Writing a Put is a PROMISE to BUY the stock at the strike place if the holder of the Put exercises the option to sell at the strike. A shorter who wrote puts for 20, will have cover short shares if the option expires below the strike. OK, it is not a cover. The Shorter/PutWriter will have to buy back stock at the Strike or higher. But in one sense, if the option expires in the money, then the supply of stock to cover the short is guaranteed; Put holders will be demanding the Writer to buy to stock at strike. What I think makes this technique work is ambush. The sudden increase in Put Options that (I think) were written and bought under the same roof - No real $ change hands. Closely on the heals, within minutes, the stock is aggressively shorted. This instantly raises the volatility of the stock (raising the Black-Sholes Option Value) and driving the Stock price closer in the money (also increasing the BS Put Value). Now the Puts get sold into the open market to long stock holders who are paying 1.60 to insure their 21.40 stock from going below 20. Good grief! on 10/27, someone paid 1.45 for a put to sell at 20, when the stock closed at 20.86. Go figure. about the only theory that makes any sense is that there are two large players that have different risk appetites, and are using the market to arbitrate I am begining to think it is not two independent players with different risk appetites, but two hands of one player. The "put buyer" has inside knowledge of what the "put writer" is about to do to the stock. The "Put Buyer" sells into the honest market after the bomb has gone off. Your strategy to buy the call to cover is a true cover of shorting risk. But there is not nearly as much profit in it. First of, the supply of options isn't there. Second, you have to buy the option compared to writing the put where people pay you. If you bought the call, you would have to pay somewhere from $1.40 to $2.20. for the AMDAU (Jan 22.5). It didn't drop below $1.00 until Dec. 1. So you start shorting from the high 21's, yet you squandered your potential profit buying the Call, which you believe from your impending shorting actions will expire worthless. Conversely, if you write the put (and buy it with the other hand), then bomb the market with a huge short, you suddenly increase the value of the put you now hold. Then you sell the puts at the height of the "panic". You short the stock from the high 21's, and sell the puts for 1.60-2.00. It's like shorting from 23.5 with the price already dropping below 21.50. Kinda like an arsonist that first corners the market on fire extinguishers. It’s an effective way to generate demand for your product. Anyone with a better explanation? -Magrathea