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"The diffusion equation shows the most instability at the boundaries"....I
like that statement. Sounds like something from chaos theory and points to
inefficiencies read "risk" and "opportunities". I have charts showing ten
for one gains and losses during this week.
BobR
At 12:03 PM 7/22/97 -0000, you wrote:
>Let's not forget that if you are using a general equilibrium option
pricing model such as Black and Scholes, the diffusion equation shows the
most instability at the boundaries, in this case expiry. The model is not
wrong, it simply is not conducive to gamma trading close to expiry
(impossible in some markets).
>
>I like to take a view before close out and manage my strikes accordingly.
I avoid needing to trade options with less than 4 weeks to maturity.
>
>Z.
>
>-----Original Message-----
>From: ric ingram [SMTP:ringram@xxxxxxxxxxxxx]
>Sent: Sunday, 20 July, 1997 9:20 PM
>To: RealTraders Discussion Group
>Subject: OPTN: Expirations
>
>BobR wrote;
>
>>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.
>
>In the UK FTSE-100 futures and options there is a predictably regular
>attempt to ramp up the price just prior to expiry.
>
>If you were extremely quick, this was particularly easy to exploit last
>Friday (July 18, 1997) - the FTSE cash was rising to 2 points shy of 5000
>(an all time record) just before the period at which the settlement price
>is calculated. In fact this represented a 50 point rise from its
>overnight close.
>
>So what? It chose the completion of the settlement time range (about 10:30
>a.m. local time or 5:30 a.m. EST) to then start a 150 point dive (3%) to
>recover and end up some 70 points in the red. Definitely a major swing
>day, exactly coinciding with the expiry day and the expiry time.
>
>Does the S&P exhibit similar behaviour on option/future expiry days?
>
>Regards, Ric.
>
>P.S. For those of you in the US scared of the S&P antics recently, the
>range for the September FTSE-100 futures on Fridays was 4830 to 5014 or 184
>points (or over 3.6%) on relatively high volume. A lot of money changed
>hands!
>
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