...when nearing expiration the stock price hovers over the strike price with the largest amount of open interest. So in effect the MM's moved the stock price in the direction that has caused the most amount of ATM options to expire worthless. Has anyone ever observed this or is it conspiracy? I am short the SPY MAR 31 80 Call and it is ATM (part of a spread), expiration is on Friday and I remembered reading this in a book. Wondering if it is a concern for anyone.
To me, it's all nonsense. Statistically some stocks must get pinned to the strike price. It's always easy to find some that did and scream ' "aha - I told you!." Academic studies have shown that there is a SMALL tendency of stocks to move towards the strike, but not because MMs gang up to make it happen. Those who are long calls sell stock (to neutralize long delta) as the stock moves above the strike, thus pushing it lower. Those who are long puts tend to buy stock (to neutralize short delta) when the stock moves below the strike. Thus, pushing it higher. There 'natural' trades can help keep the stock near the strike. But, it's not a conspiracy Mark
Ok thanks Mark that makes a lot of sense. Earlier in the day my short call was ATM and I was considering buying 50 shares to neutralize it but wasn't too sure about the details and how it would've played out. i ended up buying the call back at around 1pm for for a loss.
No ......The stock doesn't move toward the options with "largest amount of open interest" its that the ATM options provide more bang for your buck and are more popular. Highest open interest will always be at the current stock price, if there is a huge movement in the stock price then option open interest will follow the price
1) Your reply has nothing to do with the stock being pegged (pinned) to the strike. 2) And the current ATM is NOT ALWAYS the series with the highest open interest. Where in the world would you get such an idea? Do you believe that when the stock is 101 that the 100 line has the highest OI, but if the stock moves to 104 then the 105s magically have the highest open interest? 3) Do you know what the open interest is? It's not volume. Mark
Well, Jeff Augen in "The Volatility Edge in Options Trading" made a good argument for stock pinning in the final option trading day (with the proper stock criteria). In fact he presented a way to exploit the volatility collapse of the final trading day. The technique didn't jive with me because I don't have the resources to implement it and although he made a good argument, he didn't really present enough statistical evidence for me to be convinced yet. It is worth further exploration in my opinion.
I thought my post had some interesting info. So you were a buyer? If you were a seller then you would have decreased open interest, correct? ------------
Not that it's a conclusive study but several years ago I looked at the price distribution of 8-10 consecutive expirations. I looked at 10 and 25 ct intervals. With nearly 3,000 optionable stocks, it's reasonable that some should be pinned. But would there be a larger than expected number? I never saw it and concluded that there was no edge there. AFAIK, it's a myth until the day comes that someone consistently posts 3, 5 or 7 days before ecpiration what stocks will expire at what strikes and I'm not referring to those with no pulse volatilities.