“There’s something very fishy about the weekly options market,” Philip Elmer-DeWitt reports for Fortune. “Is it time to reel in the bad guys?”
MacDailyNews Take: Well, it would be nice if it was done sometime.
“It was 3:48 p.m. on Friday April 29 and traders who had purchased Apple (AAPL) April 29 $350 ‘calls’ — options that gave them the right to buy Apple shares in blocks of 100 for $350 per share — were sitting pretty,” P.E.D. explains. “The stock was trading around $353.50 and those calls were worth more $350 apiece (the difference between the price of the stock and the so-called “strike price” of the option times 100).”
“Then, in an extraordinary burst of trading — exacerbated by the rebalancing of the NASDAQ-100 scheduled for the following Monday — more than 15 million shares changed hands and the stock dropped below the $350 strike price just before the closing bell,” P.E.D. reports. “Result: The value of those calls disappeared like a puff of smoke.”
P.E.D. reports, “For people who follow Apple — investors and speculators alike — it was sickeningly familiar turn of events, one that has its own language and terms of art. The tendency for an underlying stock to close at or near an option’s strike price at expiration is called “pinning.” And the point at which a stock will close to the greatest detriment to anyone holding options at expiration is called max pain.”
“There’s a whole library of academic research documenting the max pain phenomenon. Perhaps the most famous is a 2005 study in the The Journal of Financial Economics that the New York Times reported on the following year. The authors, working at the University of Illinois, examined five and a half years of stock trades and found the pattern charted at right. The percentage of securities that closed within a few cents of the strike price of one of their options was too great to be attributed either to chance or to normal hedging activity. The shares, they concluded, had been manipulated,” P.E.D. reports. “For the record, manipulating a stock in this way is illegal.”
Much more, including some illuminating charts, int he full article here.