Posts filed under “Options”

Apple Closing = $500 is Not Proof of Conspiracy

One emailer is an oddity, two a coincidence, three emails plus a respected tech site means this is a full blown trend. Thus, I am compelled to address this:

There seems to be a bit of paranoia circulating amongst the intelligentsia ignoramia that the mere fact that Apple’s stock closed at precisely $500 on Friday was proof positive of a grand conspiracy to manipulate markets.

The odds were so strongly against this exact close occurring randomly, the argument goes, that something nefarious had to be afoot.

Where this argument fails is that this is hardly random. You see, Friday was an option expiry — that is when all of the various Call and Put options at various strike prices expire in or out of the money. Apple being the single biggest stock (by capitalization) and one that has had some pretty big moves up (up 100% from Q2 2011 to Q3 2012 highs) and down (off 29% since 2012 peak).

Lots of these folks have their Apple common stock positions hedged with these options. If they want to cover some of their downside, they buy puts. If they want to juice their returns to the upside, they may own calls. But unlike stocks, which do not have an end date, all options have a time value and a date when they will eventually expire. Out of the money options expire worthless.

Which is what leads to pinning. There are folks who may want to roll their option positions over (sell the current month, buy a later month) or unravel a current position or create a brand new one. The largest open option position can impact trading of the stock.

Note that both options and stocks trade via continuous auction process. This sometimes results in prices being pinned to a strike price (see chart below). There was an enormous amount of open interest n Apple Options, and $500 is a big round psychological number. In this case, the $500 on the nose was the lucky winner.

There is an enormous amount of literature on Option pinning and (delta/gamma hedging) strategies to take advantage of it. It is a well known phenomena.

~~~

There are many, many, many things to be angry at Wall Street about.  This is not one of them . . .

 

 

Price action around a pin often resembles a “dampened harmonic oscillator

Source: Investing with Options

Category: Options, Trading, UnScience

VIX Has Largest Weekly Down Move Since Inception

The CBOE has a nice piece out noting this week’s 39.1 percent collapse in the VIX was the largest weekly percent down move since the index was launched in January 1990.  The week also saw record volume days for the VIX futures. The move even exceeds the largest weekly down move on the VXO, the…Read More

Category: Markets, Options, Think Tank, Trading

One Week!

Joseph Saluzzi (jsaluzzi-at-ThemisTrading.com) and Sal L. Arnuk (sarnuk-at-ThemisTrading.com) are co-heads of the equity trading desk at Themis Trading LLC (www.themistrading.com), an independent, no conflict agency brokerage firm specializing in trading listed and OTC equities for institutions. Prior to founding Themis, Sal and Joe worked for more than 10 years at Instinet Corporation, pioneers in the…Read More

Category: Options, Think Tank

A Look at Volatility Index (VIX) Since QE2 Began

Since QE2, Volatility has been falling. As the fascinating chart below from Ron Griess shows, the volatility of markets, post Flash Crash was drifiting lower until the modest sell off in March 2011 sent the VIX spiking. > click for larger chart

Category: Markets, Options, Technical Analysis

On Executive Compensation & Wealth Transfer

Today’s QOTD: “Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs. There has been a massive wealth transfer from middle-class America’s retirement accounts to the bank accounts of the privileged few. The social consequences of this wealth transfer bear scrutiny.” -Albert…Read More

Category: Corporate Management, Options, Philosophy

Do Underwater Homeowners Have Zero Cost Option on Home Prices?

Do underwater homeowners have a zero cost option on future movement of home prices? That seems to be the conclusion of the SF Fed, who note that for the upside-down borrower, there is merit in staying put. “Given the importance of falling house prices as a factor in defaults, it is natural to ask how…Read More

Category: Credit, Options, Real Estate

Widespread Fraud, Option Backdating, Exec Felonies

The amount of Corporate Fraud in our system is far greater and more endemic than most people want to believe. That is the conclusion I have reached after watching The Street and senior corporate executives for 20 years. Not just at Wall Street banks, but at a vast number of publicly traded companies, the executive…Read More

Category: Legal, Markets, Options, Regulation

The Daily Show: Lenny Dykstra’s Financial Career

Baseball legend Lenny Dykstra becomes a financial guru then loses it all, despite the glowing praise of many.

Be sure to see the the special surprise at the end!

>

Category: Humor, Investing, Options, Video

Jon Markman: Buffett in Trouble?

I’m not so sure I believe the wild speculation part of this (last para), but I know Jon Markman, and he is a thoughtful and sober guy. He writes: Shares of Warren Buffett’s insurance holding company are on the ropes this month, plunging 30% in part because the famed investor dabbled in an area of…Read More

Category: Derivatives, Markets, Options, Valuation

Revulsion or Lack of Interest?

Andrew Lees of UBS writes: Yesterday’s equity rally was fascinating; not because of the excitement it has caused but because of the sheer lack of interest and belief. Having spoken to half a dozen people this morning about it, without exception no one either bothered to try and explain it or thought anything of it,…Read More

Category: BP Cafe, Markets, Options, Psychology