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Titanium Metals Corporation Message Board

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  • raybans2 raybans2 Jan 21, 2006 3:28 PM Flag

    Options

    I've always been confused as to why people think options can affect the price of stocks. They aren't even traded on the same exchange as stocks. Exactly what mechanism would be used to affect the price, who would do it, and why? How does someone that doesn't even own a stock affect the price of a stock?

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    • It would be my understanding that although the individual who buys an option 'call' does not own the stock. Someone does own those 100 shares of the stock though and had put it onto the market as a 'covered call'.
      So the market does have to keep a balance of shares available to cover the calls if they come to expiration in the money. So if they lack enough shares to cover the $70 calls then they could work the price of the stock down in order to let the option expire worthless and therefore they do not have to let any shares exchange hands.
      Someone can correct me if I am wrong on that.

      • 1 Reply to j_m_s_j_r_s
      • I called my broker about this to get clarification when I first became authorized to buy options. When an option expires there are no stocks to trade hands, only the profits if any. I asked the question: What if I buy a call and I want to own the stock if it expires in the money? He said I would have to buy it as a separate transaction. It's the same if I sold a put because I wanted to buy the stock at a certain price.

        If an option expires "in the money" the profits are simply removed from the contract writer�s account and deposited into contract buyer's account even if it�s a covered call. Only people who want to cover their calls do so. Many calls are naked. All puts are considered naked though I suppose you could cover a put by shorting a stock but I have never heard of this mentioned anywhere. When you cover a call by owning the stock the CBOE has no knowledge that you�re doing this. This is something you do on your own to mitigate the risk if the stock goes up. However, you broker may force you to cover your call if your not authorized to write naked call contracts. This is just a risk mitigation issue.

        Basically, no stocks are exchanged on the CBOE (Chicago Board Options Exchange), only the contract fees and the profits. I can't see why a stock exchange market maker or specialist cares what goes on at the CBOE. MMs trade stocks.

        The obvious relationship of the price of options to the price of stocks is inherent. But I do not see any relationship of the price of stocks to the price of options. I�m not saying there isn�t any. It�s just that no one has explained this relationship to me in a credible way and I don�t tend to believe things until I understand them.

 

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