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Options Buzz: Amazon Anxiety Has Traders Taking Lumps for the Greater Good
By Dan Colarusso
Senior Writer
It's just before 9 a.m. Tuesday, and the American Stock Exchange options
floor is quiet. There is no din of excitement, little haste, and few live
bodies except for some traders taking in the morning's news in preparation
for the open.
In one far corner of the Curb's floor, options specialist Frank Maiolo is
checking prices before trading starts in Amazon.com (AMZN:Nasdaq) options.
He looks over a chain of strike prices ranging from 37 1/2 to 350, a
trading range that holds dangers at both ends.
"Now I know how the turkey feels the day before Thanksgiving," Maiolo said
on the morning after Amazon popped 15 points. "Hours feel like days; days
feel like months. I traded Microsoft (MSFT:Nasdaq) in 1989 after the San
Francisco earthquake closed the Pacific [Exchange] floor, and that's the
only thing that comes slightly close to this. We're in uncharted waters."
The extremes of Amazon's moves hold the greatest threat to floor traders.
In single trading sessions, the stock gobbles up new ground like the
Minnesota Vikings' offense and crashes through strike prices thought
unreachable the day before. The market makers must take the other side of
the trade, opposing the legions who are buying the online bookseller in an
effort to catch a little more of its meteoric rise, and then try to hedge
by buying stock or other options.
In the old days, say 1996, floor guys would worry when a broker
representing a major Wall Street power came into the crowd with an order.
These days, however, retail orders come in like a swarm of mosquitoes to
nip away at a trader's P&L. And, distinctly in the Internet sector, Ma and
Pa Kettle have replaced Morgan and Stanley as the sharks.
"It's clearly not Goldman Sachs banging up these stocks," says Jon
Najarian, the head of options firm Mercury Trading, which trades many
Internet and tech stocks on other U.S. options floors. "You get 20,000
prints of 300 shares each. The problem is that there's not the liquidity in
the name."
That lack of liquidity causes one big problem for floor traders. On
Amazon's big days, the stock moves so quickly that traders can't hedge
their call sales by buying stock at the same price. Retail investors play
momentum -- they pretty much have no choice -- so floor traders get piled
on as stock becomes scarce and they're forced to pay more to get it.
For instance, an investor's buy order comes down for an Amazon.com January
300 call. The market maker on the other side of the trade would typically
sell the calls and then buy the stock, which is trading for, let's say,
295. With the velocity of its recent movements, Amazon stock might be at
302 by the time the market maker can get enough stock to hedge the sale.
"Most traders are happy if they can get stock about 1/4 or 1/8 off the
price. When we get within $10, we're pretty psyched," says Kristen Daly, a
Group One trader and the crowd's lone female. The youthful Daly came to
Amazon during the summer, she says, bored with a sedate pit that gave her
far too much time for crossword puzzles.
Keith Keenan, an options trader at discount firm Wall St. Access, feels her
pain even though he's on the other side of the order flow. His firm's
clients are just the kind of independent-minded, chase-the-mo-mo investors
who have made hay trading Amazon options, mostly buying calls as a cheap
proxy for the stock. "It's so hard for these guys on the floor to get
hedged. If I go down to buy 200 Amazon calls, they're going to run for
cover," Keenan says. "If you go larger than a 100-lot, you almost have no
idea where you are going to get a print."
The Amazon booth at the Amex is small one -- maybe six or seven traders --
but it is by no means the province of small fry, mostly because it takes
deep pockets to sustain the kind of damage that being short these options
brings. "In the 10 years I've been here, it's the most difficult trading
I've seen," says Stephen McQuade, a market maker in Amazon. He estimates
that trading Amazon requires at least $1 million in capital. "There are a
lot of independent traders capitalized at $250,000 who can't come in here
and afford to blow $100,000 in one day," he says. Maiolo chimes in that
some traders have lasted just one day trading Amazon before opting for a
less volatile way to make a living. The NYPD Bomb Squad might be one
option.
Typically, Daly offers, when a stock is rallying, there are investors
willing to sell some premium (that is, sell calls on the chance that the
stock might actually sit still for a while). That sentiment has yet to dawn
on the Amazon devotees, who as of midday Tuesday had to pay 21 ($2,100) for
a call that was struck about 30 points out of the money.
The same trend is noticed upstairs. "I heard one Yahoo! (YHOO:Nasdaq)
trader say, 'You don't trade these stocks, they trade you,'" says one
trader with a Chicago-based brokerage. "The difference with the retail
clients is that they will keep paying up. Once it [the stock] gets going,
they keep buying calls. Institutions won't do that."
Yet Amazon's 30-point days have yet to really rattle this bunch. "We're
making fairly orderly markets. All of these traders have been around,"
McQuade says. "When it's been up 35 in one day, no one looks like they're
close to suicide, although I've been a little white." Maiolo says he tries
to never go into a fast market (the condition in which publicly
disseminated quotes can't be relied upon). "The public likes to get the
prices they see on the screen. We try to do that with all the Internet
stocks," he says.
Maiolo, McQuade and the others are taking their lumps for a greater good.
They are trying to develop a franchise in the listing, to win all the
valuable major firm "switches" that route order flow to certain exchanges.
Of the four exchanges that trade Amazon options, more volume comes through
the Amex floor than any other, with the Chicago Board Options Exchange
crowd running second. "Trading this stock costs us [the traders] money and
will continue to cost us money, but it holds the potential to be a strong
trader in the future. We're here for the long run," says Maiolo, who works
for GHM, one of the more important Amex specialist firms.
The liquidity problem may be eased with the 3-for-1 split expected next
week, but the Amex traders aren't sure of when the action will get easier.
"Maybe when it hits 400," says one, to the nervous laughter of the others
before Maiolo warns. "That could be by the end of the day."
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