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.

Strategies & Market Trends : Stochastics -- Ignore unavailable to you. Want to Upgrade?

To: Pavel who wrote (350)	3/16/1998 11:03:00 AM
From: Wayners	Respond to of 927

I think determining where a stock is going to move just before options expiration has to do not only with the number of open contracts but also where the stock is trading in relation to the strike prices for those open contracts that will be nearing expiration. For example, lets say there are 500 contracts open for Mar calls for the $30 strike price and there are 350 open open contracts for the Mar puts for the $30 strike price. Lets say the stock is currently trading at $32, so those 500 calls are $2 in the money. Here's how you would exercise those 500 calls. You sell short 50,000 shares of the stock between $31 and $32 which helps drive the stock price back down. You then tell your broker you want to exercise your calls, so you buy 50,000 shares at $30 from the people that wrote the $30 calls and then use those shares to cover the 50,000 share short position. My point here is that the price will frequently be driven to the nearest strike price just before options expiration. The above just helps explain why that might happen. If the stock had been below $30, the holders of the put options would have started buying 35,000 shares of the stock so that they could put or sell those shares at $30 be exercising the put options that somebody else had written. The writers have to buy your stock for $30. That buying would tend to drive the stock price back up towards the $30 strike price. In this example with 500 contracts in calls and 350 contracts in puts, the tendency will be for the stock to finish up at options expiration slightly below $30, slightly more selling pressure than buying pressure as caused by the unequal open option contract positions.