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American Capital Agency Corp. Message Board

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  • yourbestfriendintheworld yourbestfriendintheworld Jun 6, 2012 6:57 PM Flag

    OT: Interpreting open interest

    Open interest is simply long positions that haven't been closed or exercised. If you see a knot of open positions at strikes nowhere near the current stock price it means only that the stock was formerly near that price and something interesting was happening.

    If you see a knot of open positions at strikes near the current stock price it only means that people are trading normally.

    If you see half a million open positions it means we're very near ex-div and someone has entered into dividend-trade strategy:

    In your particular example, it could be that someone has opened a bunch of strangles with Dec 30 Puts paying off the downside moves and Dec 32 calls paying off the upside moves. Or it could be random people playing OTM options, some of which are no longer OTM.

    The apparently low open interest on the Dec 32 Puts is interesting. You'd think people would think 32 was an easy get with a div and a SPO coming. The premiums must be consistently outlandish.

    What will happen close to expiration (minutes, not hours or days) is that the nearest strike that is ITM will become a magnet. People long those options will prefer to lock-in their remaining value rather than risk losing it to a blip in the stock price (or, indeed, to the expecation that others think the way they do about their options). They will turn-and-burn. If they are playing calls, the exercise has no effect on the market price, but the sale does. With a number of contracts closing in a narrow window, it will drive the sale price down towards that strike. Puts would do the opposite to pull it up.

    Since this is June and not December, and since the price is already close to 33, I think the numbers you've posted won't have any bearing at all on the stock price for quite some time.

    Still a week-plus to expiry, and a likely div announcement to go, yet, so the 32's probably won't play. It's likely we'll be low-33's at a minimum, and see the Jun 33 calls pull it down next Friday, but if we're high-33's watch for the Jun 34 Puts to pull it up.

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