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  • jdienes jdienes May 21, 1999 2:21 PM Flag

    Yahoo News - TheStreet.com Article

    Expiration Has Options Traders on Pins and
    Needles
    By Gregg Wirth
    Staff Reporter
    5/21/99 1:50 PM
    ET



    Expiration Friday was short on
    volatility but long on anxiety as traders tracked the
    high-volume listings that could be subject to late-day
    pressure.

    They were watching out for potential
    "pins," or stocks that finish the day just shy or right
    at the strike price with the deepest open interest.


    Volatility Index
    Today % Change
    25.97 -1.10

    Source: ILX


    Pinning is an expiration-day
    phenomenon in which stocks that are heavy options favorites
    -- like Dell (DELL:Nasdaq) or Intel (INTC:Nasdaq) --
    are subject to volatility based on hedging and other
    trading patterns associated with options expiration.


    For example, Yahoo! (YHOO:Nasdaq) was hovering near
    its May 150 call strike this afternoon, down 2 to 149
    1/2. Compaq (CPQ:NYSE) too was sticking close to its
    May 25 calls, down 3/8 at 25 1/8.

    "I can't
    remember an expiration day this quiet," said Gary
    Semeraro, options pro at S.G. Cowen. "It's as if everybody
    is waiting for something to happen."

    Indeed,
    the pin activity in several options favorites was
    apparent because institutional trading was thin. Usually,
    any large order will blow through the pinning
    patterns a stock may experience, leaving market makers
    scrambling in its wake. In light action, the Dow was down
    about 40 at midafternoon.

    Put/Call Ratio

    Today (Noon) Previous Close
    0.50 0.31
    Source:
    ILX


    That doesn't mean the day was dull,
    however. The pinning situations can get sticky for market
    makers as they try to unwind positions by buying back
    call contracts and selling shares, usually at a ratio
    of two calls to every share, said Rod Jamieson,
    options strategist for Everen Securities. "Usually
    pinning just involves a half a buck on either side of the
    strike price," he added.

    Both Microsoft
    (MSFT:Nasdaq) and America Online (AOL:NYSE), rumored yesterday
    to be pin-pressure candidates, were dropping today,
    possibly as specialists tried to keep the stock prices
    away from the option strikes with heavier open
    interest.

    AOL was above 130 at its open this
    morning, and that could be bad news for market makers if
    they are short a large portion of the massive
    13,925-contract open interest. If AOL closes above 130 today,
    market makers would have to buy all their call contracts
    back or pay up for the shares to fulfill their short
    option obligations.

    Late Thursday, a Chicago
    trader said AOL had been "hit" and was likely to get
    pinned to the 130 strike. Today as the stock burned off
    a few more bucks -- it was down 3 5/16 to 126 3/16
    at noon -- that seemed less likely.

    One AOL
    trader said the floors were short many of the May 125
    calls, which had open interest of only 7,000 contracts,
    and long the May 130s. "It may get pinned at either
    price," said one AOL trader.

    The open interest in
    the May 125 options, both the puts and calls, was
    over 22,000 and the natural hedging that was going on
    today was likely to keep the stock around that price,
    said one New York trader.

    Yet AOL trading
    wasn't volatile. One trader said the traffic came from
    institutions selling June options at relatively inexpensive
    levels. "By doing this, they're essentially saying that
    they're not expecting AOL to move much in June," the
    trader said. "If investors were looking for an
    inexpensive play in AOL, the June options would be the way to
    get it."

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