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 : Micron Only Forum -- Ignore unavailable to you. Want to Upgrade?

To: cgraham who wrote (38687)	9/19/1998 7:10:00 PM
From: Carl R.	Read Replies (1) \| Respond to of 53903

With a monster number of calls outstanding like the the 12000 MUIF calls (i.e. 1.2 million shares) it makes it very difficult for the stock to get through 30. Most calls are purchased by speculators, as are puts. That means that the other side of the transaction is held by a professional option writer. The option writer attempts to make a risk-free return, and is usually able to do so except when the stock gaps up or down (note that options writers on CIEN got burned badly recently). When a stock moves fast up or down, but doesn't gap, the options writers always make money. What happens is that as the stock approaches the strike price the delta rises. The delta is how fast the option prices moves relative to the underlying security, and tells the option writer how many shares of the stock to short or buy relative to their underlying position so that they can remain risk neutral. With the stock at 28 and one day left, the delta was low, but as the stock rose to 30 on Friday, the delta approached 1, forcing option writers to buy additional shares. Whenever speculations sold the calls to close that allowed the option writers to sell shares. Thus as the stock shot towards 30 and above, option writers bought shares, moving the stock up faster. But then with the stock above 30, the holders of the options started closing positions, causing the option writers to sell shares, pushing the stock back to 30. No dark conspiracy, just a natural market effect. But the point is that the stock couldn't get through 30 on Friday almost no matter what. Now what will happen Monday? Hard to say. As for me, I'll find out tomorrow if I am still long as I took the opportunity to sell MUIF calls, which I refused to cover, so my shares may get called away. Considering that at all times the options sold at a premium to the stock, I can't imagine why someone would have exercised the options rather than selling them, but stranger things have happened. But anyway, as for Monday, it will be a new game, without any unusual effects from the options. It could go up or down, and 30 will no longer be any special barrier. Carl