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Dendreon Corporation Message Board

  • j1stocks j1stocks Apr 29, 2009 12:03 AM Flag

    Option pricing is dis-array

    We won't know until tomorrow which strikes if any were exercised or assigned in all this. It typically takes longer than the window given before the halt for that to happen.

    If the open interest is close to what it was today, demand for the stock should remain up. I don't know why so many used stop/loss orders, when the call volume & open int dominated the puts & approached 100K from strike $25 & upwards.

    When you look at those #'s you have to conclude that the bulk of the weakness in price prior to the "event" was mostly due to shorts covering against a bigger move up.

    Tomorrow morning the options are in dis-array as the pricing is well out of range of the stock. Traders will no doubt try to take advantage of that so it's likely to take a few minutes before the pricing is normalized. That's the part of this that I hate the most.

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    • >>>Tomorrow morning the options are in dis-array as the pricing is well out of range of the stock. Traders will no doubt try to take advantage of that so it's likely to take a few minutes before the pricing is normalized

      This is a good point.

      I think I'll place several limit orders to see if I can snag some options on the cheap right at the open.

    • constant.spiridon Apr 29, 2009 1:07 AM Flag

      I do not think that in 2 minutes it was time to order the exercise of the options which will activate the assignment carussel. If the exercise have been asked, it will be processed AH. I do not expect to see the same number of assignment mainly for puts. Because if somebody exercised the 15 put, and the stock is at 20 tomorrow, those assigned will buy the stock at $15/shrs and could sell immediately at $20, increasing the selling pressure.

      Also, if tomorrow the stock will open low, the OTM options will be cheaper than they used to be.

      Anyway, tomorow the same strike, let say Aug 25 call will have a much lower premiums because the Implied volatility (IV) will drop a lot. For example, if today the Aug 25 call could be sold for $5, tomorow w/ the stock at the same price like today ($25) we hardly could expect 2.50-3$/shr as a premium.

      On the other hand, the expected selling presure will lower more the OTM options premium.

      Less affected by IV will be the ITM options.

      • 1 Reply to constant.spiridon
      • That's wrong. Option assignments do not create market orders. They occur outside of market trades. If I sold $15 puts, & got assigned today, I would own the stock at $15/sh. That trade would not create a market bid/ask.

        The only impact it has is whether I decide to dump the shares on the market. Put sellers are not likely to do that. They are more likely to sell covered calls & look for an exit at a higher price.

        On the call side, it's all about profit takers tomorrow. Those exercising calls during the downslide will be buying the stock out of market at what we expect to be lower than market prices. They may be willing to sell quickly.

        It's really hard to say until we see what the open int is on the options. Remember though, that investors had a lot more than just 3 min's to make the decision. They could have alerted their brokers the whole time the stock was halted because option assignments are not dependant on market prices.

    • you are implying the price moves where tomorrow?

      • 2 Replies to FRD88
      • It's clear that some here don't understand options so let me explain.

        Say you bought DNDN at $14 & then decided today to buy a $20 put to lock in your profit on a slide. At the open it was an OTM put so it didn't make sense to exercise it. But when the stock slid to $11.81 it makes a lot of sense because you bought the right to sell your stock to someone else at $20/sh.

        If you didn't believe it would sharply rise you would exercise that put. I myself may wake up & find I bought DNDN at $16/sh.

        I think overall it will help move DNDN up, because I believe for most puts assigned today, investors will be very unlikely to sell their shares. As I said before, there was heavy vol of puts around the $16 strike so this could make shares tighter.

        If I do wake up & find I was assigned DNDN at $16, I will protect against a downslide by buying OTM puts or selling OTM calls. Of course I'll be up $10/sh on the stock if the AH price holds.

        I think this illustrates the single biggest mistake by investors. Guys like Cramer only teach people how to see a trade thru their eyes. A good investor will always ask why is a person selling me a call or put or buying my call or put. When you do that you gain a perspective that the guy on the other side of the trade probably got has a different entry & exit range than you for profiting on the trade.

        Every options trade needs to keep that in mind. I recently sold $5 calls in a stock when it was trading above $6/sh. It got assigned the very next day. Your odds of assignment definitely increase as your option gets more ITM.

      • YES, IT WILL.

    • Why would any strikes be exercised.

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