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At 12:24 AM 7/17/97 -0500, Mac wrote:
>One thing to consider: there really isn't much firepower left from OEX
>options for expiration. Many have been rolled or exercised already.
>Maybe that's accounting for some of the loss in implied volatility.
And LHonig noted:
>Could be, but another big reason is that the open interest has fallen sharply
>this week.......
>...the premiums on both puts and calls would be low, because there is such
low open interest. No one wants them.>>>
I can understand an overvalued contract settling back to fair
theoretical value as open interest falls. But I don't see how that
alone could beat the contract down to where it's objectively cheap.
Doesn't that necessarily involve active selling pressure?
If there is reduced activity in a contract, not much buying or
selling, the market maker would quote bid/ask based on his model
for fair value. It would be suicidal to quote it cheaper just to
generate interest. Why would it drift very far from fair value
just because it's less active?
Looking back on Wednesday's prices with hindsight, when July puts
and calls both looked cheap (just out of the money), another explanation
occurred to me: the puts were naturally pounded because of the strong
market. The calls were pounded worse by players sure of a dip. The "cheap"
puts and calls and loss of implied volatility could be deceptive.
If short term bulls and bears actually both have very strong opinions,
but express them by selling, not buying, you could have cheap prices
and falling IV, even though everyone expects dramatic change.
If you "know" the OEX will fall and want to trade size with two
days to expiration, would you expect a better execution selling
5000 calls, or buying 5000 puts?
Wayne
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