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Intel Corporation Message Board

  • aulus_vitellius_germanicus aulus_vitellius_germanicus Apr 25, 2013 1:14 PM Flag

    So Alex, can you tell us in plainspeak

     

    what is causing this counter movement in INTC today? How do options wag the dog?

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    • The other two examples SELLING CALL and PUT options sends the shares in the other direction as the exmple.

      When Intel trades in a narrow price range, the OMM is BUYING/COVERING or SELLING/SHORTING shares to satisfy large option orders. OR the OMM is taking the positions for himself.

      Narrow channel trading is usually large option action.

    • Intel is trading at $23.57/$23.58 Bid/ask
      May $23 CALL 72/73 cents
      May $24 PUTs 83/84 cents
      assuming zero cost to borrow shares to short, zero commissions ...

      They are both in the money (ITM).
      The intrinsic value of the CALL is 57 cents (market bid price - strike)
      The intrinsic value of the PUT is 42 cents (strike - market ask price)
      If I bought 1 of each, my cost would be 73 + 84 = $1.57 or a 57 cent premium over intrinsic value

      A couple of extreme examples ..

      1. How does Intel shares trade if I submit an order to BUY 1,000,000 May $23 CALL contracts at 72 cents??

      When Intel drops below the $23.58 price, the price on the CALL drops, the option market maker will BUY SHARES and sell me the MAY $23 option contracts. The OMM locks in his premium. The OMM has the Intel shares to supply to me (he bought them) and I have my option.

      The result is that when Intel drops, the OMM buys shares and satisfies my CALL order.
      THE EFFECT is when Intel price drops, the OMM is a buyer of shares. He provides a floor.

      2. How does Intel shares trade if I submit an order to BUY 1,000,000 May $24 PUT contracts at 83 cents??

      Think "just the opposite of the CALL".

      When Intel rise above the $23.58 price, the price on the PUT drops, the option market maker will SHORT SHARES and sell me the MAY $24 PUT option contracts. The OMM locks in his premium. The OMM has hedged the prospect of getting the Intel shares from me when the put is assigned and I have my option.

      The result is that when Intel share price rises, the OMM shorts shares and satisfies my PUT order.
      THE EFFECT is when Intel price rises, the OMM is a seller/shorter of shares. He provides a ceiling.

      It is much more complex when you consider the multple months, strikes and volumes

 
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