Good Morning, Friends,
No one said trading would be easy, even for market makers. GOOG closed last night at 888.79, making the Oct 890 calls expiring today roughly 50 delta. A market maker who sold a GOOG call at that strike would have hedged by buying 50 shares of stock. These folks rarely, if ever, take speculative bets on the direction of a stock; they get paid to trade volatility, and to earn the bid-ask spread on customer orders. It can provide a decent living; my former neighborhood in suburban Chicago included the homes of several CBOE traders, and they were larger, and closer to the Lake, than mine.
GOOG reported earnings last night that were, it seems fair to say, better than consensus. Today’s opening was at 976.58. That made the 975 strike the “at the money”, roughly 50 delta strike, and what had been a 50 delta strike at 4 PM EDT the prior afternoon was now 99, and headed for 100 at 4:15 today. As a matter of fact, at the moment, even the Oct 980 strikes are trading at 98 delta. Yesterday, they would have been 90 points out of the money.
Market makers in GOOG, who probably did not sleep at all soundly, looked at the screens this morning and found themselves short delta and thus short stock, and very underwater. The gap on the daily chart in GOOG will eventually be filled, although it seems likely to take a while. As holders of AAPL can attest, with success comes increased scrutiny from the market, and comparisons become more and more difficult. For today, however, after opening at 976.58, the stock refused to back off much, and is currently at 999.17 (the high has been 1007.40). “Nice move”, as they say.
Even for professionals, there probably won’t be much pressure to cash in winning tickets on GOOG and take the earnings to the bank; this is a stock that portfolio managers will want to be seen owning, and those who sell might have a tough time reestablishing their holdings. I wouldn’t be surprised to see 975 established as support now (although full disclosure: I’m wrong all the time). In any case, the urgent need of those short the stock because of their positions as option market makers to get them back, at whatever price, helps to explain why there hasn’t been much of a sag in the price on profit taking, despite the remarkable rise this morning. A fair number of the buyers were grabbing shares because they needed to get their positions back to net flat, and had no stock to sell once they had done so. “More buyers than sellers”.Â
Options can bounce around, but on expiry Friday, at the close they are all in the money, with 100 delta, or out, with 0. That explains a lot of what occurs in stocks with large option open interest at expiry; it isn’t market manipulation, typically, so much as it is market makers trying to make sure that they’re fully hedged in the strikes that are likely to finish at 100 delta, and unhedged in those that are likely to be valueless in late afternoon. It’s normally a pretty profitable business that can pay for nice houses on the North Shore, but days like today can make it tougher.Â
In any case, I wouldn’t be inclined to be short GOOG in anticipation of a rapid move to fill the gap. I suspect that the ranks of those who wish they had owned it yesterday afternoon are pretty large, and as noted, not every buyer today will become a natural seller.
Here’s hoping that the day is going well; all the best!
Join Over 84,750 Traders Receiving Our FREE Daily Trading Videos