Page 486 - THE MARKET WHISPERER

482 PART 15 - Special Occasions, Special Rules

What happens when the majority of the public believes Apple will fall,
buys large quantities of put options, and towards expiration date Apple
does indeed drop? Does this mean the pros have taken a loss? Occasionally,
yes, but not always. The pros who write the options have deep pockets
and are capable of shifting almost any stock back to the price where most
options expire worthless. Moreover, their way of protecting themselves
from any fall in the price of Apple stock is to short the stock. When they
short Apple, they profit from the drop in the share price and can pay you
your profit on the put option. When do they close (i.e. buy) their short? On
expiration day itself. When they close shorts, which means they are buying
stocks, they help the stock price rise, and often cause the price to return to
exactly that point where most put options expire as worthless.

An exercise in logic: Let’s say that the public buys a large quantity of put
options on the market index. In other words, most of the public thinks the
market is going to go down. What do you think will happen in the market
towards expiration of the options? You’re right: the market will go up!
Since the options writers could lose from a drop in market prices, they will
bring the market to the price level where the options expire as worthless.
Remember that the options writers are serious pros, and pros never lose.

When will we feel the professionals’ activities? Usually, they start shifting
market direction towards the required price over Tuesday and Wednesday
of the expiration week. After reaching the required price during the first
half of the week, Thursday and Friday will generally be “flat” days.

Conclusion: expect a very volatile market on Tuesday and/or Wednesday
of options expiration week.

The period is the week ending on July 18, 2010. It is a fairly erratic
time, towards the end of the financial crisis, and several weak European
countries are on the verge of bankruptcy. There is real concern over a sharp
fall in the stock market. Many funds and investors fear market plunges,
and by way of protection buy SPY put options to hedge their long-term
investments.

These heavy investors presume that if the market drops, they will lose
on their stocks, but will cover these losses through the profits on options.
It’s a bit like buying insurance meant primarily to cover your own back
rather than to actually help your clients. Who is selling options to the
heavy investors? The pros! With the period above being a highly agitated
one, the quantity of put options is far greater than call options. All that is
left for the pros to do is bring the market price up on Tuesday [1] to where
most of the put options expire as worthless, and maintain that target until