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Lets face it. Option models do not work well during expiration week.
Premium pricing is in large part dependent on order flow stemming from news
and other forms of manipulative persuasions. I have yet to see an intraday
option model and have observed first hand time premium adjustments near the
close and just after the open when the MM's have a feel for things.
Perhaps DR OEX would comment on this. There does appear to have been a
pattern develop during expiration week that defies precise explanation or
prediction. The name of the game is corner the market on the contracts so
the methodology is to have strike price range shifts up and down and to
target a range for the close on Friday to minimize liability and maximize
profitability for those truly in control and that isn't us out here in
retail land. That is the thesis, and trading has to be adjusted
accordingly if you are going to play with these gamma trades.
When implied volaitlity gets quiet that is just the time you want to go on
alert, because when the ratio of short term to long term volatility drops
to low levels and then starts to rise in concert with other indicators,
watch out. A chart was posted here a few days ago illustrating the VIX
zone score as oscillating in a tight range about zero with the comments
that it was acting like a snake ready to strike. It struck on Friday as we
now know. An updated chart is attached again for review. It shows the
last two sell signals(pivots) and the 5, 20, 90 day price distributions of
the OEX.
BobR
At 11:04 PM 7/18/97 -0700, Wayne Moody wrote:
>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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