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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Roads End who wrote (17764)	2/20/1998 2:21:00 PM
From: Hugh W.	Read Replies (1) \| Respond to of 97611

Steve, Option expiration works this way. For example, if open interest on Feb 32.5 calls are 30K and the Feb 35 puts are 15K, this means more people want to push it down to 32.5 than push it up to 35. This is not always true. It's depending on the market condition.

To: Roads End who wrote (17764)	2/20/1998 3:15:00 PM
From: Just_Observing	Read Replies (2) \| Respond to of 97611

Here is my simple explanation of how options work and why prices tend to move towards strike prices on options expiration. In the market, there are six possible postures one can adopt. Three are bullish and three are bearish Bullish - Buy Stock, Buy Calls, Sell Puts Bearish - Short Stock, Sell Calls, Buy Puts When the public is a net buyer of calls, the market makers are then net sellers of calls. They have been forced to adopt a bearish posture. So they have to balance their risk by selecting a choice from the bullish side. Their simplest choice is to buy stock. So let's say that there are 10,000 net calls of CPQ Feb 35 expiration, the market makers are carrying 1000,000 shares of CPQ to fully hedge their risk. Now let's get down to options expiration week. Some of the public that bought the calls may decide to buy the stock but most may be speculating and don't really want the stock. So they start selling the calls. As they market makers buy the calls back (i.e. the public is a net seller), they start selling the stock because they do not want to have more stock than the underlying options that are still open. The selling will only stop when a strike price has been reached and the public is no longer making money by selling the option. So it is not unusual for stocks to finish options expiration at a strike price especially if there had been a very large open interest in that option. What applies for calls will also work for puts. To hedge puts, market makers short stock. As puts are bought back from the public, the stock is also bought back pushing its price higher until it hits a strike price where equilibrium is established. I have simplified the analysis by just looking at just call options at a single strike price. In actuality there are options at various strike prices and there are both calls and puts and people are often rolling options from month to month. However, it is not difficult to do the analysis and explain what happens on option expiration. If you read today's TheStreet by Cramer, you will see that the Nasdaq market sold off earlier as the market makers sold stock for the underlying options as speculators had bought large numbers of calls that expired today. These thoughts are just my own observations of the market and I would welcome other views. Good Luck. San