What if open interest is skewed one way?

ATN trade update.
Till today everything was (and still is) by the book (or my theory).
ATN was up yesterday (with overall market down, even oil/gas drilling industry was down).

My 0.65 calls form few days back were $1.65 ITM.

I interpreted the up move yesterday by large open interest (14704) for $25 puts that suddenly were way otm one day before expiration (so MM covered the shorts).

At the beginning of this thread I stated:
So with large open interest (especially for front month, low option volume and low stock volume) any move in the underlying will be magnified since “the firm” to be neutral will buy more stock with move up and sell more with move down (regardless if calls or puts were involved).

so could Today’s down move and volatility be a result of a lot of open interest (puts) going in/out of the money.
<b>I do not see any news but today the stock volume is 483300 with average of 110,344</b> so definitely the volume and stock is influenced by options (volume and open interest) and my contribution to this thread was to illustrate it.
Will try to do some historical analysis of options (volume and open interest) for stocks with average low volume since I belive there are more 'ATNs'.

<b>
BTW:
1. Where is the hedge fund for expiration day selling ‘pin’ puts and calls where you need them.

2. Stock trades at 25.00 sharp (pin reward/pain when you do not need it).</b>

 

Nice analysis. You noticed there is 14,607 OI on Feb 30 calls as well right? When were these initiated? I will do some number crunching this weekend.

BTW, who still doubts expiration pinning?



PS don’t bet on the “board experts”, they’re busy calculating greeks

 

25 puts and 30 calls both have highest volume so which strike are you expecting some pinning??? Both these options will expire worthless today.

The stock was up yesterday to 26.64 and is down a lot with the rest of the market.

The board experts are not busy calculating greeks, we are making money and not chasing strikes

 

I wasn’t addressing anyone in particular, just always notice the bookworms piling up when “gamma” is mentioned. No offense please.

So let me crunch some numbers, meanwhile does this chart really look random Brownian to you?

 

I just think you will chase strikes if you try and play the pinning game. With every example you find, we can find an opposite example I think.

 

optioncoach
Just not to get into an empty messages exchange, you are one of few here I will stay away from arguing about options.
But, I belive you are missing the point of the thread (and my analysis) and you just automatically replied when seeing ‘pin’.

1. ‘Pin’ was mentioned only once at the end of my last post as sort of by-product of analysis Entire analysis for the last two weeks was to show how volume/open interest influence low volume stock and there is nothing about chasing strikes in my analysis.

2. <b>The stock was up yesterday to 26.64 and is down a lot with the rest of the market.</b>
Stock is way down today (8.78%) with market almost even and was up with market down yesterday.

3. Look at intraday (attached) chart and volume being 2,292,600 (average: 110,344).
http://finance.yahoo.com/q/bc?s=ATN&t=1d

I followed the action of this stock for two weeks (read my last few posts here) and while I should close my calls with great profit there is not question ATN action was influenced by hedging etc. of options (I think)
Every large options trade was accompanied by sudden stock move at the same time.

Would agree that pinning most stocks is a myth (unless a lot of options and small volume).

<b> With every example you find, we can find an opposite example I think.</b>
To the same tune: understanding of “gamma” is a myth, show me a person who does and I will show you more who do not.
BTW: If you read my first post in the thead, I found ATN almost by accident (small volume and options acitons at the time I was looking for some example).
I would repeat nonprophet: No offense please.
So let me crunch some numbers...

 

Mark:

In all honesty I was responding to nonprophet joking about those who doubt pinning so I am sorry if it got crossed with your conversation. I actually only read his post and just made a remark and did not happen to follow your analysis so I apologize.

Also I never mentioned "gamma" lol so I do not know where that came from.

If I understand it you are looking at relationship between volume of options and the strikes but again sorry that my conversation got crossed with your analysis

 

Markg:

Congratulations on making money on that stock. You have earned it w/ your analysis. I really enjoy it when I read about people making money with all sort of self designed ideas.

I think that your analysis holds potential. I have a similar thesis about the indices, but I think that your analysis is even stronger when it relates to lower volume stocks with higher volume options.

In indices, my thinking is that when insurance seekers buy puts, the put sellers simply turn around and short the underlying if/when they do not have those puts in inventory.

That is why I think that when the market goes south and there is an increase in put selling (which is usually accompanied by higher implied volatility) the move is faster and larger because of additional short selling.

When that cycle is over, the insurance buyers start selling their puts, which then leads to buying stocks from the computer MM side. This may explain the sharp rallies. However on the way up it may not always work that way as the computer MMs can always lower the IV, and things should not move either too fast or too large as is the case on the way down.

Your edge is of type 2 or 3 in my classification of edges.

I suggest that you test your strategy. I am lazy, and just play an index but I would love to learn from what you are doing. It would also be great if you were to share another other stocks.

BTW: how do you get your list of stocks?

In addition one does not need to buy the call until one sees that the stock is heading back up. One can go long for instance when the high of the previous day is broken. What do you think?

In addition, did you consider selling an ITM put rather than buying the call? You would gain more, and if the stock takes time to mone theta is on your side. However if the analysis is wrong, and the stock sinks, the dangers are greater.

Would love to read your response. Congrats and thanks again!

 

Probably a waste of time , IMO.
One of the examples:

•Stock is at 50 , I bought to open 10k ATM puts a week or so before exp.
•Stock tanks to 40 , puts becomes deep ITM
•There is a huge b/s spread ; bid is way below intrinsic [ less than 10$]
•I am approved for PM , so I buy 1mil shares to lock the profits ( and even after paying cost of carry still way ahead vs selling to close my puts )
•OI still shows 10k and ANY Max Pain software shows 50 strike as potential pin at exp.

What anyone does with this info now ?

 

But it becomes interesting when stock volume is way below 1M. Prequisite indeed is that the money at stake is high compared to the stock turnover, so the tail is wagging the dog.

Besides it’s a numbers game right? If nine out of ten times it is false alarm then we’re playing the coin toss and break even. The one time it is a genuine signal we make money. Just an edge is good enough.

Unfortunately these things are darn hard to backtest.