Show and tell. First the good news then the puzzles wrapped in conundrums buried in an enigma. The solution is at the end.
Google was the one that I thought would get pinned. See what happened.
Google Price Chart for Friday 20th March 2009
Google opened the trading day Friday at about 330.5. The highest it got in the day was 332.29 and the lowest it went was about 327. So it stayed within one percent of 330 all day long. So I sold some 330 straddles at 10:00 and bought them back at 3 PM and wasn’t really worried all day long.
If you look at the price chart from Noon to 2:00PM and compare it to the SPY chart below, you see that Google dropped with the rest of the market. While the market, using SPY as a proxy for the whole market, dropped 2.7% in those two hours, Google dropped 1.3% about half the market’s move.
This follows the S&P 500
Autozone, Baidu, and Chicago Mercantile Exchange
In Thursday’s post, I saw that there was a large imbalance in the number of calls and puts set to expire Friday for Autozone, Baidu and the CME. It seemed to me that this would tend to drive their prices down for the day. Since when the call holders sold them for a profit, the market makers would unwind their position and sell stock.
This is the chart for Autozone on Friday 20th March 2009. It is closer to a pin than dropping as I thought it would from the options open interest.
Autozone 20th March 2009
The drop from Noon to 2 PM was 1.25% very similar to Google. And Autozone’s range for the day was from a high of 162 to a low of 157. This is just 1.25% around the strike of 160. Google’s range around 330 was plus or minus one percent. So Autozone was almost as tightly tied to the 160 strike as Google was to the 330 strike.
The question is why was it pinned rather than driven down by the imbalance in the open interest?
This is what Baidu did Friday.
Baidu Price Chart for Friday 20th March 2009
Again, the range for the day was 172.43 to 177. That is closer than 1.5% of the 175 strike. So Baidu also traded like a pinned stock rather than one with downward pressure.
This is the CME chart. It doesn’t have any particular behavior.
Chicago Mercantile Exchange 20th March 2009
So What’s Going On?
You cannot tell what the stock is going to do by looking at the open interest. First, there are a lot of people who are writing calls against their stock to try to earn some income. That will inflate the call open interest. Second, there are spread traders who are long and short puts and calls so that they don’t need to trade out of the options at expiration. Third, there are put writers who are trying to get a better price to buy stock. I read somewhere that that is how Warren Buffett bought most of his Coca Cola stock.
Nice work.
Thanks, Jared.