U. of I. study casts shadow on options trading

nitro · Oct 22, 2005

Quote from loufah:

I'm sorry, I accidentally posted the URL for just the abstract. Full paper at http://www.business.uiuc.edu/poteshma/WorkingPapers/NiPearsonPoteshman.Jan2005.pdf.

You may have read the paper already, as it's over a year old (the journal accepted it in August 2004) and a thread or two on this forum have mentioned it.
More...

Thanks,

I had not seen it actually. Gonna pour over it carefully over breakfast today.

nitro

esu2 · Oct 22, 2005

Instead of debating the study, let's
discuss how we can make money off
of this supposed anomoly if it does happen more
than not.. that the underlying price will
be "pushed" toward an even strike number
(maybe the strike with the biggest open interest)
on the 3rd friday of the month.

esu2

ozzy · Oct 22, 2005

Exactly.

Quote from esu2:

Instead of debating the study, let's
discuss how we can make money off
of this supposed anomoly if it does happen more
than not.. that the underlying price will
be "pushed" toward an even strike number
(maybe the strike with the biggest open interest)
on the 3rd friday of the month.

esu2
More...

cnms2 · Oct 22, 2005

Quote from esu2:

Instead of debating the study, let's
discuss how we can make money off
of this supposed anomoly if it does happen more
than not.. that the underlying price will
be "pushed" toward an even strike number
(maybe the strike with the biggest open interest)
on the 3rd friday of the month.

esu2
More...

You may find info about how to do it in the following interview:

http://biz.yahoo.com/tm/050921/13184.html?.v=1

TradingMarkets.com
Program Trading: Here's How To Use It
Wednesday September 21, 1:22 pm ET
By TradingMarkets Research

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Is the small trader forever at the mercy of these programs that seem to occur without rhyme or reason? No! says my guest today. I am pleased to be joined by Hank Camp of HL Camp and Company, a program trading research firm. Mr. Camp has studied program trading for the past 23 years and has quantified exactly when, where and the likely direction these market shaking programs will occur. This interview will reveal many of the hidden truths about program trading and teach you how you can consistently profit from them. Let's get started.

murray t turtle · Oct 22, 2005

Quote from nitro:

===
October 18, 2005

BY DAVID ROEDER Business Reporter

How honest is the stock-options market? Newly published research from academics at the University of Illinois said there are times big trading firms manipulate the market to their advantage.

The manipulation, which is illegal, takes place in the final days before options expire within a given month, said the study published in the October issue of the Journal of Financial Economics.

The study is the work of finance professor Neil Pearson, associate professor Allen Poteshman and Ph.D. student Sophie Xiaoyan Ni. They based their findings on a mathematical analysis of data from the Chicago Board Options Exchange that covered trading from 1996 through 2002.

They said big investment banks that trade for both themselves and customer accounts often steer the markets by selling options on specific stocks a few days before expiration. Then, they trade the stock itself so the price finishes "out of the money'' at expiration, meaning the options they sold won't be exercised, the researchers concluded.

That allows the firms to keep the premiums they collected, which represent the cost of the options they sold.

"This is an extremely profitable business'' for the investment banks, Pearson said. He said the practice hurts some individual traders, but that more likely victims are market making firms that work the CBOE floor.

A CBOE spokesman had no immediate comment. It was the leading market for stock options during the years the study covered.

The researchers also cited benign factors that contributed to stock-market disruptions on option expiration days. Options, which are contracts to buy or sell a stock at a given price, expire on the third Friday of each month, and traders have long noted that the day brings heavy volatility.

Overall, the value of stocks that have options attached to them changes an average of $9.1 billion on expiration day, the report said.

The researchers could not say which investment banks engaged in manipulation because the data they saw included only general coding about the sources of the trades. But their information has been sent to the Securities and Exchange Commission, which could follow up with more scrutiny.

Pearson and Poteshman said nothing in their work indicates options trading is inherently corrupt. But they said they found strong evidence that options trading influences stock prices, an issue that's been a long-term SEC concern.

Although both professors specialize in options research, they said they don't trade the contracts.

"Independent of this study, I don't think it makes much sense for retail investors to trade options,'' Pearson said, acknowledging that his view would earn him enemies on La Salle Street.

Poteshman said options could be useful, but commented, "I would probably think twice before buying an option that expires in a few days.''

http://www.suntimes.com/output/business/cst-fin-cboe18.html
===

nitro
More...

=======
Thanks for Chicago link.

Probably earns more laughs on LaSalle street than enemies;
meaning probably should think/study much more than twice,
before buying ''option that expires in a few days''

Maybe strange,GOOG selling off before expiry;
but selling off close before earnings announcement is
most common.
YHOO sells off before earnings, like many of them do;
especially if dont have a real good swing profit in position.......

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U. of I. study casts shadow on options trading

nitro

esu2

ozzy

cnms2

murray t turtle