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Technology Stocks : MRV Communications (MRVC) opinions? -- Ignore unavailable to you. Want to Upgrade?

To: Mike Winn who wrote (6546)	12/18/1997 9:59:00 PM
From: WBendus	Respond to of 42804

Mike, As a result of the tremendous volitility that use to be associated with tripple witching, the powers that be have staggered the expiration of the various instruments that when un-wound accounted for all the volitility. Futures, futures options and S&P 500 index options now have staggered expirations to help smooth out the volitility. S&P 500 index options have changed to Thursday expiration (I think Thurs. AM). The direction that stocks trade ahead of and during triple witching is really a function of the types of positions being un-wound, they can either be higher or lower as a result. After the expiration un-winding there needs to be a settling of the positions which usually happens the day after the expiration. Tripple witching actually does not officially end until tommorrow afternoon when stock options settle. Supposed that in order to capture a risk free arbitrage opportunity where the S&P Futures are trading at a premium to the S&P Cash index I simultaneously buy a basket of S&P stocks and sell S&P Futures. Since the S&P Futures equals 500 times the S&P Cash, this means that I must buy 500 Baskets of the S&P stocks (a buy program) and since I need to account for transaction cost I must do this in a substantial quantity, something like $50 million. When the contracts expire, I will sell the S&P stocks to settle the S&P futures. It is all a real big hedging strategy where there is a benefit greater than the riskfree rate of return between building the positions. Un-winding the position at expiration can result in a lot of volitility. If you watch CNBC in the morning, they will periodically post the theoretical Buy and Sell program premium numbers. The premium is based on the difference between the S&P Futures contract trading price and the S&P Cash Index trading price. Buy or sell programs will come into play when that premium level expands to a certain lever (a buy program) or shrinks to a certain level (a sell program). The level is determined by the time to maturity (expiration) and cost of capital needed to finance the position (usually the the shortest t-bill rate). Because there are so many oportunities for arbritage with various futures (S&P, Nasdaq and DOW), futures options, and stock options, the un-winding process can get messy. After reading my explanation, I realize that I may have only confused you more. The jist is hedging where their is a small benefit derived and because some of the vehicles used in the hedge expire, you must at somepoint unwind it. The unwinding process can result in violent swings in either up or down movements, they are not necessarily always down. Wayde. Wayde.