Pinning is a very common factor driven by standard delta neutral trading (i.e. the bulk of large trading activity). I've seen the, by now tired, discussion of "max pain" trotted out many times over the years. The thing is that max pain is not some super conspiratorial manipulation by sinister "big traders." It is purely and simply what happens naturally as gamma approaches 100% (i.e., into expiration).
It's almost options 101 (or at least market maker 101): For every long there is a short; as time ticks away the atm options become for all intents and purposes 100 delta options. Therefore, as price movement swings back and forth across a strike, the longs (and possibly, conversely, the shorts as well) are actively trying to squeeze premium value out of those options.
For instance if I am long 100 80 strike calls on abcde stock and the underlying trades up to 80.25 with less than an hour or two to expiration, I will sell 10000 shares against those calls to lock in the quarter premium. I now synthetically own 100 long 80 puts. If my selling action (and if there are a lot of other open contracts at the 80 strike, the selling of many others) drives that stock back down to 79.75, guess what, I now buy 10000 shares to scalp another quarter out of the market. Lather, rinse repeat, as the pendulum wobbles back and forth and the scalps get tighter and tighter to the point where I'm scalping 10000 shares for a nickel or ultimately a penny.
That's what pins a stock and, even as with goog on earnings, there is a very strong chance that a gap on the open will lead to huge trading at whatever strike it happens to open at since even at 10 am on expiration Friday a goog straddle can still be trading for $2 or $3 or more – which when you think of it, isn't very much on a $580 stock (imagine how normal it would seem for a $58 stock to have an atm straddle trading for $0.20 or $0.30 on the expiry Friday open). that $2 or $3 premium has to be made up somehow in just six or so hours. If that doesn't drive the pinning frenzy then nothing else will.
From: OptionClub@yahoogro
ups.com [mailto:OptionClub@yahoogroups.com ] On Behalf Of Adam Green
Sent: Saturday, November 28, 2009 10:46 AM
To: OptionClub@yahoogroups.com
Subject: Re: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]
I took an interest in pinning when I was trying to trade GOOG expiry and earnings. It wasn't until I read Augen that I at least started to understand at least one way to trade pricing anomalies rather than insisting the market be fair, orderly or consistent.
That paper is a very heavy read and not much fun unless you really enjoy GOOG. I think the writer could go back and condense the work to three pages and set aside the repetitive narration of price action as an appendix (to be appropriately ignored.)
The writer says his piece on page four: GOOG tends to pin on the "maximum pain" strike; and similarly, trading around earnings tends to show a directional bias.
The writer goes on to make poorly substantiated connections that "selling" is the driving force and that there's a conspiracy to leak information ahead of earnings. Anything is possible and the SEC watchdogs have been proven to be slumbering for years, so we can't expect foul play to be discovered let alone punished, but I don't think GOOG stands out as a unique stock in this regard. It's widely held with a high percentage of institutional interest and it's in the S&P -- I think these facts contribute to its price action. The paper is a little dated and could do with an update (and a decent edit to improve the writing!)
The whole gist of the paper starts to take shape around page 25 (!) when the writer considers the issue of price pinning. I think GOOG price action into last day of expiration trading has changed since '08, but it's still quite frequently going to reflect the options traded in the last four weeks and open at expiration.
Thanks for reminding me about that paper. I guess I need to take the time to go back and read it thoroughly again and see what else I remember.
On Sat, Nov 28, 2009 at 6:40 AM, bben1006 <bben1006@yahoo.
com > wrote:
Michael,
As someone that is specializing in GOOG for so long, did you notice any of the 'special' quirks mentioned in: "Has Google Stock Price Been Manipulated?" by Jerry Wenjiu Liu, from California State University,
(see http://papers.ssrn.com/ ).sol3/papers. cfm?abstract_ id=1337350
Given your experience, do you think he has any valid point?
Also, regarding backtesting--I always questioned its usefulness especially for American style options—how one could possibly account for early assignment or exercise,--etc. ..
BBen
--- In OptionClub@yahoogroups.com , "mcatolico" <mcatolico@...> wrote:
>> Not sure if I'm getting your point exactly but - having traded goog every
> month since it started trading in '04 (I think) - I can say that it does
> have its own little quirks but in general it's really no different than any
> other trading vehicle.
>
>
>
> Prices/implied volatility are just the consensus bet on value. If you trade
> that vehicle either or long or short you are simply doing what everyone who
> trades is doing i.e., saying that the market consensus is either too high or
> too low and that you think differently. Any vehicle that has occasional
> binary events (such as earnings releases) is likely to have a few
> multi-strike gaps (though a ten point move in a 580 stock is hardly
> earth-shattering). And just as likely, there will be periods of
> consolidation or indecision when price seems to go nowhere for months. If
> you could find a model that back-tested profitably in goog, you would have a
> model that back-tested profitably in just about every other tradable
> instrument. Now whether that backtest would be of any value going forward is
> a completely different story.
>
> J
>
>
>
>
>
>
>
> From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com ] On
> Behalf Of Adam Green
> Sent: Friday, November 27, 2009 3:32 PM
> To: OptionClub@yahoogroups.com
> Subject: Re: [TheOptionClub.com] Re: Basic Calendar Question
>
>
>
>
>
> I haven't read the whole thread, but I would caution anyone using horizontal
> positions or anything relying upon limited movement (not volatility) in
> GOOG. As we caught a glimpse over the holiday break, it has no hesitation
> to move through a strike. Look at days when GOOG has moved through more
> than three strikes ... or find a month when a Straddle on GOOG would not
> have been profitable (assuming a reasonably durable trading plan.)
> F'rinstance, I can't back-test it easily on thinkorswim (maybe someone can
> show me?) but I've noted for some years now that I can buy a Straddle, wait
> for it to move through a strike, take profit off the one side and roll it
> vertically or horizontally either adding or subtracting contracts depending
> upon preset rules for risk and profit based on technical analysis of price
> action, especially momentum and overall market action.
>> On Fri, Nov 27, 2009 at 12:32 PM, bben1006 <bben1006@...> wrote:
>
>
>
>
>
> MC--
> I did, and this is what I got with an IV of 55% - I wonder why?(I must have
> mistyped something.)? In any case, I think that with your Hoadley's
> calculator it will be very easy for you to replicate the entire comparison
> exercise (FSLR vs GOOG, say) - for the point I was trying to make.
>
> Regards,
> BBen
>
>> --- In OptionClub@yahoogro
ups.com <mailto:OptionClub%40yahoogroups.com > ,
> "mcatolico" <mcatolico@> wrote:
> >
> > Why wouldn't you use an option calculator? With your parameters on goog I
> > get the 630 implied value at 14.95 or so.
> >
> > -----Original Message-----> > From: OptionClub@yahoogro
ups.com <mailto:OptionClub%40yahoogroups.com >
> [mailto:OptionClub@yahoogroups.com <mailto:OptionClub%40yahoogroups.com > ]
> On
> > Behalf Of bben1006
> > Sent: Thursday, November 26, 2009 11:12 AM> > To: OptionClub@yahoogro
ups.com <mailto:OptionClub%40yahoogroups.com >
> > Subject: [TheOptionClub.com] Re: Basic Calendar Question
> >
> >
> >
> > Your best way to realize/see the differences between these stocks is to
> > 'standardize' the option chain of each underlying by dividing the entire
> > chain (put and call prices and the strikes all for the same month) by the
> > current price of the underlying stock. The resulting standardized chains
> > will illustrate to you the (nonlinear) pricing-effect of the volatility,
> > giving you the relative costs of the options in relative terms to the
> > percent at-the-money and out-the-money strikes.
> >
> > For example (all with approximate round-offs) : FSLR is currently $120.97,
> > with ATM IV 55%.
> > The Dec 130 call is nearly 7.5% out-of the money and has a relative price
> of
> > 2.28% ($ 2.75/$121).
> >
> > Compare this to, say: GOOG, currently at $584.75, with ATM IV 22% .
> > The Dec 630 call is also nearly 7.5% out-of-the money, but it has a
> relative
> > price of only 0.22% ($1.25/$585). Note that in order to match on the FSLR
> > volatility, the price of this GOOG 630 Call option should be about $13.3.
> >
> > You can do the rest of the calculations.
> >
> >
> >
> >
> >> > --- In OptionClub@yahoogro
ups.com <mailto:OptionClub%40yahoogroups.com > ,
> "Peter Gum" <peter.gum@> wrote:
> > >
> > > Take look at the premiums on things like AMZN, GS, BLK and IBM, for
> > example.
> > > The absolute amounts are substantial, though I have not done the
> > > money-at-risk or ROI calculations. An enlightening exercise can be to
> > > compare the return on the spread with the premium on a comparably priced
> > (to
> > > the spread) stock. Spreads of any sort look attractive sometimes.
> > >
> > >
> > >
> > > phg
> > >
> > >
> > >
> > > -----Original Message-----> > > From: OptionClub@yahoogro
ups.com <mailto:OptionClub%40yahoogroups.com >
> [mailto:OptionClub@yahoogroups.com <mailto:OptionClub%40yahoogroups.com > ]
> On
> > > Behalf Of billb_
> > > Sent: Monday, November 23, 2009 9:37 AM> > > To: OptionClub@yahoogro
ups.com <mailto:OptionClub%40yahoogroups.com >
> > > Subject: [TheOptionClub.com] Re: Basic Calendar Question
> > >
> > >
> > >
> > >
> > >
> > > I don't understand what price has to do with any strategy to be quite
> > > honest. If price of the underlying gave you an edge, wouldn't that be
> > arbed
> > > away?
> > >
> > > --- In OptionClub@yahoogro <mailto:OptionClub%40yahoogroups.com > <mailto:OptionClub%2540yaho
ogroups.com > > ups.com,
> > > "drrobhansen" <robhansen5252@> wrote:
> > > >
> > > > I had heard either during a webinar or maybe in a magazine that
> calendar
> > > spreads are best put on with high priced stocks. Is there anyone that
> > would
> > > explain to me why it would be advantageous? Or maybe I'm just mixing
> this
> > up
> > > with some other strategy?
> > > >
> > > > Thanks,
> > > > RFH
> > > >
> > >
> >
> >
> >
> >
> > --------------------- --------- ------
> >
> > The goal of TheOptionClub is to provide a forum for members to work
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>
> --
> Adam
>
--
Adam
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