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Answer to Knee about not understanding my example of short vs long options and various other scenarios to boot. Stevieioh also asked nme to do a post on this and this is a good a time as any.
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Knee - let me try the options example one more time.

The options on MSFT last month strike 70 were something like 150,000 calls and 70,000 PUTS.

Assuming those were long calls(perferably from J6P) there simply was no way in H, regardless of what earnings MSFT came up with, that MSFT 70 calls were going to finish in the green.

15,000,000 In the Money shares. The sellers of those options would never let that happen. But.....
What if those were covered calls or short calls (from the MM's perspective it is the same). The MM owns the call and not J6P. It is in the sellers (the MMs') best interest to see MSFT at 75 (then call the shares away at 70, sell them SLOWLY to the market at any price above 70 and make out like a bandit. Now 70K put options is nothing to sneeze at either but it was less than half the call voulme. Remember the two spikes right before earnings to 70. My guess is the crooks knew which was MSFT was headed and went short enough shares as close to 70 as possible to cover the known downdraft that was about to happen. (Yes I really do think it is this crooked).

In general one can "assume" that the options are long options and not short options but there really is no way to tell. I would gladly pay for the information. That was the point of my reply.

For three months in a row, MAJOR stocks have finished right on Max pain. INTC BRCM KLAC AMAT BRCD CSCO. Trying to apply max pain to GNSS EMLX or other lightly optioned stock is worthless. INTC is a bellweather for me as it is the most reliable. It usually closes exactly on a pure strike point 32 1/2, 35, 30 etc. Last month I could not make up my mind between 32 1/2 and 35 and it closed in between.

I suggested a short straddle on QQQ last month and the month earlier on INTC. (I did neither). Two months ago the INTC straddle (selling both the 32 1/2 puts and the 32 1/2 calls short) would have collected on both.

There was a big brew-ha-ha last month on a post about selling the 32 1/2 INTC short straddle. Otter did a post and called it a "sure fire loser" or something to that effect. Well although it went way against someone who tried it, it came back to earth and was a winner.

In a sideways market, the crooks will manipulate the big stocks to the point at which the most options expire worthless. If one knew for SURE, who was holding the options and that open interest in calls was indeed long calls as opposed to short calls (the MMs on the calls on a covered call situation) then one would have an easier time betting on a crooked close.

In a strongly trending market, max pain is totally useless. What happens is this. The market is flat. The MMs sell a bunch of calls on JNPR (for example) at say 15 and a bunch of puts on JNPR at say 15. The MMs are perfectly happy to have JNPR finish exactly at 15 on expiry and collect on 100% (both the put buyers and call buyers at 15 lose everything).

Now, if there is huge buying in JNPR and the MMs sold a bunch of calls they are hurting big time. They do not like to get hurt. If they can not contain the price of JNPR, then to protect the call side of the equation, the MMs go long JNPR. Of course this pushes JNPR up futher. As long as call buying continues and $ keep pouring in, the call sellers have to keep buying JNPR to cover the call side. EXPLOSIVE RALLY!

If one looks at max pain, it will look like a total failure. In fact it was not a failure at all. The MMs collected 100% of the put money, and hedged long by buying common for every call that was sold. The crooks would prefer to keep both halves of the option pie, but if they can not contain a rise or a fall, they hedge in that direction which intensifies the selloffs as well as the rallies.

All last summer, the market just drifted around and unless call buyers timing (or put buying timing) was very good , and profits were taken immediately, option buyers lost big time. Once the market plunged, delta hedging kicked in and for every put that was sold, the MMs shorted enough shares to cover the downfall.

Finally when the market stopped falling and sat, the MMs unwinded the shorts, call buying kicked in and up we went.

Right now we are back in phase like mid-summer where stocks just whipsawed back and forth for quite some time. This will end, and best indications are that the break will be to the downside, but it is not by any means certain.

It is a very tough market right now to trade with these tight ranges.
You think a stock is breaking down and it snaps back up. You think a stock is breaking out and it falls back down. On the larger stocks like INTC CSCO MSFT etc, a lot of this is dictated by options. It is so crooked it is mind boggling. The index is dictated by QQQ puts and calls.

I lost my ass in Nov betting for a retest of the low that never happened. I just recently figured it out. In NOV & DEC, BRCD BRCM MSFT INTC CSCO really did nothing but the market shot up like all get out based on smaller stocks. Why was that?
Cause there were tons of calls on CSCO QCOM MSFT INTC BRCM etc etc but tons of puts on the QQQs (perhaps as a hedge). Thus the crooks needed to pin INTC QCOM CSCO etc in a tight range and rally the garbage to kill the QQQ puts. CSCO has really done nothing buy drift in tight range of 19-22 or so but never getting above 20 at any expiry. Hmmmmm.

MSFT is stopped dead in its track (by zillions of calls at strike 70).
All of this really crystallized for me, just this past couple months to be honest. Max pain was often reliable and often not. The key is when to use it. Sideways market, use it. Strongly trending market, toss it out the window.

As I also said one need to know for certain who has the options, but in general on the large issues I feel it probably averages out.

Sorry for the long discussion, but hopefully it provides for some explanation as to why the plunges and snapbacks go far further than anyone thinks possible once they start. It is all because of options.

How is this for an answer to a something that started out as a question on short interest?

Probably my longest response ever.
Hope it is reasonably clear.

BTW - option interest is very low this month compared to last month and next month. I do not know what it means except that is should be much easier for the powers that be to drive the market very hard one direction or the other in FEB or just after FEB expiry if they want to.

M

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Mish,

Great post you did on options and relation of QQQ and QQQ options to Csco, Intc vs the small stuff that makes up the rest of the index.

I know we don't tend to do much rec'ing on this board but that one really deserves one from everyone here.

Thanks.

Eric

BTW just to check in, I am currently short QQQ, have sold covered in the money calls on QCOM, and am long GG, PDG, HL, CDE. Defensive enough?
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Eric thanks for the compliment on the options post I did.
It did take me quite some time to do and I was hoping I was clear enough in my explanations.

I am not sure I would recommend a portfolio of all metals, but if you are in from great prices, let them run. If they peak, take your profits and be happy.

Well done. I sold my GOLD way way too early and am not chasing here.

As for QCOM, that chart seems very very weak. I spoke with rat about it today and we both think it is headed to the 30's, and ZEEV thinks 35. It also has a gap all the way back at 17, and if things get really really nasty later this year, I see no reason that the gap at 17 will not fill.

There might be some good plays on the right bios, or there might be a decent play being short retail. Steve and I are waiting for the elusive bottom on OSX but I have not pulled the trigger on anything there year.

M
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Mish

More option qs for you,

I've been studying the LEAPS book over the last week (the DC-9 autopilot works just fine), and rather than fight the short term whipsaw, why don't you just string out your time frame a little? The book makes a good point about using longer term options to avoid the turbulence (ha ha!) of the market, and it would seem in a "bubble" induced bumpercar ride we're in now, buying puts about 9 months out would be a good idea. Of course, the premium is a little high on some of them, but the time frame is right. I'm probably going to close my KLAC and DRIV shorts this week to buy slightly OOM puts on the QQQ, SMH and maybe even DOW, AA or DD, and then go long on XOI calls. The premium is a small price to pay for not being exact on timing. We all know (don't we?) that this last bubble will pop, but it's a lot easier to sleep if you have 9 months to be right. Don't even gotta worry about max pain then, unless you REALLY want to time your entry.

I'm getting tired of watching the daily nonsense. A port of leap puts would do me good. Then I could study how to write calls like the big boys!

I'm predicting the market will be down tommorrow, unless it goes up.

CH
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Mish,

<<As for QCOM, that chart seems very very weak. I spoke with rat about it today and we both think it is headed to the 30's, and ZEEV thinks 35. It also has a gap all
the way back at 17, and if things get really really nasty later this year, I see no reason that the gap at 17 will not fill.>>

I agree with that thinking at least into the 30's. The way my position is structured I have qcom with a profit down to 34. On the upside I pick up 10% in a few months. Though I will probably trade the option part at some point. 17 would suck, however. At that point I work my way out selling options. I have done this in the past, and though I don't like that position, it has worked. But what a pain. I had QCOM at 70, and was finally called away at 45 with a small profit. Now I am back in it. Also the QQQ short will cover some of this.

<<I am not sure I would recommend a portfolio of all metals, but if you are in from great prices, let them run. If they peak, take your profits and be happy.>>

The metal plays are in the money at this point, and am trying to protect that with trailing stops. I have not been allowing losses to eat my accout so have lots of short term trades is month. Zero tolerance, as the saying goes, using very tight stops. Nothing is long term at this point except a couple of ute's and REITs with good dividends that I don't trade.

Anyway, these are tough times, and I long for a decent bull market. I think the precious metals and osx are setting up that way.

Eric
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Nothing is long term at this point except a couple of ute's and REITs with good dividends that I don't trade.


I'm curious, which reits?

Jean
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Hindsight being 20-20 it is easy to build a case for leap puts. But will we re-test that bottom this year or next.
There is a huge difference.

I think I am waiting for Zeev's strong rally from 1750 or so to 2250 or so. Then Leap puts, hopefully on a huge portion of my acct, then sit back and try and relax.

Spreading the wealth around might be a good idea as well.

Retail puts, QQQ puts, SOX puts, and OEX puts.
That would cover the gamut nicely.
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<<I'm curious, which reits?>>

I like ASN and PCL. Archstone-Smith is residential properties with the best management in the business. Plum Creek is actually a timber company that makes a lot of its money buying and selling land as well as manufacturing timber products, so while not strictly speaking a REIT, it has some of the attributes, and pays a great dividend. It is probably not a buy right now, as it is sitting at the top of its range. That is unless you want the 7% div. and don't care about market fluctuations. ASN is right in the middle of its range.

I have just one utility right now, TE. This is a DRIP that has done well. I am actually out of EPN, though I plan to reload in the near future. It is moving into my buy range around 33.

I know this is not sexy stuff, but I am thinking more about return of capital rather than return on capital. And I know I am not the only bear on this board.;-)

Eric
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Thanks, Eric

My favorites are SSS, CARS, HCN not sexy, you're right, but I like them in my IRA and SEP
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