Ok another rookie question to the options traders. I have seen many references to the fact that MMs attempt to make the most widley held stock options worthless by walking the actual stock to the most logical price for this. 1. 1st of all is this really true or is it BS from traders who blame MMs for everything that moves against them. 2. If it is true is it only the NAZ listed MMs or do NYSE specialists play this game too. 3. Can anyone point me to a website or book that will explain in the best terms how I would compute the most likely target price if this is true. Obviously I can figure out how to make some options worthless vs. the stock. I have a few guesses as to possible formulas to make the best case scenario for MMs on option expiration day also. I'm interested in this information so I'm better equipped for tommorro and then the next expire date, but for an example: I hold a very happy short position on REI currently which closed at $14.50 today. I see various levels of open interest at various strike prices here: http://finance.yahoo.com/q?s=REI&d=o Now since this is an NYSE stock I'll assume (maybe stupidly) that the specialist doesn't have any interest or care about what happens to the folks dealing the options. Right? He simply marches the price around based on buy/sell orders coming in. I realize I know very little about options so please don't state that as I'm aware of it. I understand the concept of options but that's it. Any insight greatly appreciated.
I think that is bullshit, with certain rare exceptions in thinly traded stocks that might be within a dollar of a strike on expiration day.
Stock prices tend to gravitiate to a near strike price with a lot of open interest. Forx example, XYZ stock trading at 30 with lots of open interest at the 30 level. It happens because most market makers/specialist are trading delta neutral. Thus, speculators who are long 30 calls are going to try to get whatever they can for their option before it expires worthless (they do not want to own the stock) so they sell the call options. The specialist/market makers buy the calls on the bid and sell their stock hedge to remain delta neutral. The same happens on the put side. You get the picture.
http://www.ez-pnf.com/ Check out the articles on Max Pain theory, there is also a website which will calculate the MaxPain price for any stock. http://www.iqauto.com
Support and resistance levels (classical TA) will probably give you the most consistent results. Sell puts below support; sell calls above resistance. Every now and then Don Bright comments on how stocks like IBM are controlled by the CBOE. He's probably the best guy to answer that.
#1 is your answer and metooxxx got it right IMO. Max Pain is max bullshit. Most of the open contracts are nearest the closest strike because that's where the stock has been trading. Most people work "around the money" contracts. The MMs generally could care less where the underlying closes because they are capturing the spread and time value - as they hedged with the other side.