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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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    • aulus_vitellius_germanicus aulus_vitellius_germanicus Apr 25, 2013 2:20 PM Flag

      But how come this is holding back a big move up today when it didn't the past few days?

      • 3 Replies to aulus_vitellius_germanicus
      • Holy smokes, the stock has gone up for seven straight days! Even god rested on the seventh day.

        And the stock has substantially outperformed the NASDAQ since April 5th, so it's not the result of a general market increase...

      • If you look at the APR pricing, you can see that the $23 CALL is 57/59 and the PUT is 44/45.

        If I buy an ITM call and put, it would cost me 59 + 45 = $1.04 That is normal time value pricing.
        If that pricing held next Thursday, I could buy a put and call for a 4 cent premium, exercise the call early, grab the dividend then exercise the put to dispose of the shares.

        22.5 dividend - 4 cent premium = 18.5 cent profit (minus commission & fees).

        If I am GS or JPM or hedge fund X with near zero commissions, I can lock in small profit.

        Next Thursday, the premium will not be 4 cents on the option pair. It will be 27 cents. There are people who have found ways to arbitrage that discontinuity in pricing. Arbitrage.

      • The quick answer is that, the option activity I described provides a GRAVITY or ATTRACTION to the strike price levels. That is where the option leverage and therefore the premium is highest for both the PUT and CALL options. Normal selling or buying can chew through the bonds of that attraction.

        The blizzard of option buys/sells at different strike prices and months makes it fun for the OMM to get it right. If an ETF or buy comes in and drives up the price, the orders that controlled the price may lose their effect.

        IMO, the May 3rd weekly options opened up today and they are going to see some healthy volumes. They were not open yesterday. May 3rd is ex-dividend day so options can be owned on both sides of the dividend award and creates a headache for the OMM.

    • aulus_vitellius_germanicus aulus_vitellius_germanicus Apr 25, 2013 2:19 PM Flag

      Thank you Alex...that explains it all.

    • 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

    • 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.

 
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