Option expiry Friday

Discussion in 'Trading' started by pumpanddumper, Aug 15, 2007.

  1. I feel like everyone and there mother has August S&P puts and puts on the major indexes and are up a fortune.

    Anyone here milking them out for another day right into Friday?

    I feel we are due for a major bounce to the upside in the next two days and the more pain next week.

    Any theories going into this Friday options expiry and how the markets will react?
  2. I think exact opposite will happen...

    They want to bleed the hedge funds and weak hands some more and get the market lower.

    Huge rally on rumors of fed rate cut next week...
  3. Hope everyone executed their puts Thursday afternoon. What perfect timing on the FED's part Friday.

    I'm ready for the next leg down this week.
  4. you've been ready since 2004!
  5. piezoe


    I know no more than the rest, but here is at least a plausible explanation for the action we saw Thursday and Friday.

    Going into options expiration Friday it was obvious that some major option writers were in danger of being deeply under water as there were huge numbers of put contracts above 1400, and at 1400 there was a gigantic open interest spike of 120,000 contracts. There was another spike of half that much at 1375. By Thursday morning, after a very weak close on Wednesday, there had to have been real panic that all those short puts might end in the money on Friday. The market continued to fall early Thursday, but by 1 pm apparently the news of pending Fed action had leaked because a rarely seen V-bottom formed. (It was critical that the news be leaked in time for the market to react before the open on Friday, as the settle price for the S&P options was to be determined by the opening prices on Friday am. There was a counter reaction at 2:15pm on Thursday, but it did not hold (not everyone was aware that the Fed was about to act, so naturally some were selling the rally that began at 1 pm., but very soon enough buyers, who are aware, come in and create massive short covering and a huge rally to close the S&P well above 1400. By Friday at 11 am the news is widespread and the rally continues.

    Now i don't believe that the 50 basis point cut can rescue this market in the long run, but it certainly was enough to rescue all those hedge funds and others who were under water in puts. I think in all likelihood that was the purpose of what was a desperation move by the Fed to rescue the major players. Since the Fed could not very well announce before they officially met, the only way to get the news out in time for a rescue before the settlement price was determined on Friday am was to leak it. The Goldman Sachs leak was carefully worded so as not to appear as obviously coming from inside information. And judging from market action here and in Hong Cong there must have been been wide spread dissemination of the "rumor" that the Fed was about to lower the discount rate. The move achieved its apparent goal, but nevertheless "we are not amused."