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To: Amy J who wrote (79297)	4/15/1999 5:49:00 PM
From: Ben Antanaitis	Respond to of 186894

Amy, RE: what do you mean by max pain point? Please stop by my web site, ez-pnf.com Go to the Max-Pain&#153 Options analysis page. On that page there are links to current and historic Max-Pain Point&#153 graphs for various stocks that I am collecting statistics on. There also is a link to detailed definition of the Max-Pain Point&#153 and a full explained example of how to do the calculation. Ben A.

To: Amy J who wrote (79297)	4/16/1999 7:43:00 AM
From: GVTucker	Read Replies (1) \| Respond to of 186894

Amy J, in response to your q's: <<- is the analysis the same for both cases? (i.e. is the net effect the same regardless of whether it's hedging or manipulation?) i.e. is there only one mathematical analysis? >> My understanding of the manipulation argument is that the market makers are either net long or net short an option, and want to be out of the money at expiration. This would tend to drive a stock not only toward a strike, but also through it. The hedging argument would argue for a stock price targeting the nearest strike price. In my experience, the manipulation argument has absolutely no basis in fact. <<- what do you mean by max pain point?>> This is in reference to an analysis commonly referred to on this board which purports to measure the strike price where the market makers supposedly will make the most money. This analysis ignores the fact that almost all the market makers have hedged positions. <<- does "buy" get exchanged with "short" everywhere?>> Yes, my apologies. I had a brain freeze. The market maker would have to short the stock if he was selling a put or buying a call. <<- how do MMs make money off the spreads if hedging is adding to their costs (I got confused on this part, i.e. under what typical scenario will hedge costs be less than gains in spreads...and how would a MM foresee this, i.e. what factors?)>> Sure, hedging adds to the cost. The trading costs are low enough that there is still profit out there for a market maker. But if you don't hedge, the market maker takes on market risk. And, contrary to what many retail investors think, the market makers have absolutely no idea where the market is going. The smart market makers know this. The dumb ones don't, and go broke pretty quickly. <<- why are they trying to maintain a hedge position around option expiry time (or were you saying they maintain a hedge position all the time? If yes, does a MM need to report total % of fund which is hedged because of the cost of hedging? How do you know when a MM is hedging or not? >> Market makers maintain a hedged position all the time. Close to expiration, that drives deltas closer to one. (Which means a market makers hedge ratio becomes 1 to 1, 100 shares of stock for one option contract.) Prior to the time around expiration, the hedge ratio is lower, and thus the stock activity is lower and less apparent. If a market maker is working for a large firm, he/she is always hedged, or fired. For a smaller firm or an independent floor trader, this may not be the case, but that person won't be in business too long. The larger players, the ones that drive the market, are hedged. <<- if hedging is very good, why don't more people do it? why wouldn't we do it?>> The public's cost of trading is much higher than a market makers. Note that commissions is a very small portion of the cost of trading. Things such as cost of funds and execution costs make the strategy that the market maker can use to make money a non-starter for the average investor. <<what decision criteria is used for determining whether or not hedging is a good idea under what circumstances? e.g. is it dependent upon size of portfolio, risk/reward preference, etc.? >> This area is a little qualitative for me to give a definitive answer. In my book, hedging for the institutional or retail investor is generally a bad idea. There are many intelligent individuals that would disagree with me. <<- what did Ibexx mean by a pressure point between 55 and 65? Is that the point where the # of puts and # of calls begin to merge to a particular strike price? how does this differ from your analysis, or doesn't it?>> My understanding is that her concept depends on a net long or net short position by the traders on the floor. As you could probably imagine, I do not agree with that contention.