Based on the number of options in the money outstanding today, we have a net of about 1.4M shares that will be "called" away on Monday. Anyone knows what happens in this situation? Presumably, many option writers have shares to cover but those without will have to buy it in open market on Monday and hand over to the call holders. In that case we could see a surge on Monday at the open? Anyone has similar experience?
Concerning what will happen to 1.4M shares that are subject to "call" because they are in the money, my guess:
1. Those who short shares will either cover or not cover
2. Those who exercise the options to buy shares will either sell those shares or hold the shares.
So, is it a wash?
a)This has nothing to do with the shorters.
b)The 1.4M shares will be automatically exercised on Monday because they are in the money and the options were not closed out. If they did not want to acquire the shares, they would have sold their in the money calls on Friday. It takes a lot of cash for the option holders to acquire these shares, so no reason to exercise just to turn around and sell. Those who exercised wish to hold on. I personally feel there may be slight positive effect from this phenomenon at the open on Monday.
---"Based on the number of options in the money outstanding today, we have a net of about 1.4M shares that will be "called" away on Monday. "
Actually, it isn't quite that simple (although I wish there was an instant demand for 1.4M shares on Monday morning)!
Because the options specialists at the CBOE/Pacific/ISE exchanges are usually hedged when they cross an options transaction that results in more option contracts, the amount of CALL contracts representing open interest usually results from two types of transactions (and I think you alluded to this):
1. Covered calls written by holders of the underlying equity, or
2. Naked calls
Naked calls are much less common and are unhedged.
There are two reason for the origination of covered calls:
1. An equity holder SELLS (writes) a covered call AGAINST HIS OWN LONG SHARES as a hedge against downside.
2. An options trader (like me) BUYS calls outright and the options specialist has to hedge the position by buying the equivalent shares (long). But because doing so often requires immense amounts of capital, options specialists also try to find institutions that have agreed to write calls against a large long holding in OVTI that they might have.
As I understand these transactions, most call options are hedged in this way, so the shares that need to be "called away" don't get "bought" from the open market on Monday morning. Rather, they are already owned by someone else in most cases and the ownership merely changes.
Anyone else have any comments to add?
Thanks for sharing your knowledge/opinion. I think you are right about the covered calls. There may be some naked calls but may be a small percentage. Etrade allows me to sell naked puts but not naked calls. I don't know the policy over at Ameritrade or other brokers. may be the same. Etrade told me writing naked calls is too risky so they don't allow it at all as a company policy.
Maximus: nothings happens on Monday because it is a national holiday.
Presidents' Day, also known as Washington's Birthday, is a national holiday in the United States of America celebrated on the third Monday of February. It is a combination of two previous holidays, Lincoln's Birthday (February 12) and Washington's Birthday (February 22).
That sounds true but unlikely. We can see volume pick up during the week but not from options maybe short orders starting to cover. Investors will try to find a good entry point. Price can come down more on Monday morning then climb up towards closing. We will see a steady rise during the week. This price is a good entry point. Company needs to do better accounting. That is not easy because they dont sell directly. Can do better. Another reason that this can jump is that there can be a buyout at any price below 30. Considering the fair value of this company and future demand for digital cameras. Strong buy in my book. Enjoy your profits from this level. Next week will be interesting.