Daily free option reckoning trade
Once a month, the stock market provides us a unique opportunity. In basketball terms, it's like the market makers have the ball with time running out in the quarter - or the game - and they nearly always bury that critical three-pointer. For those more predisposed to hockey, think about the "empty net" goal to close out the game. That's probably more fitting because the retail trader is mostly defenseless as the market puck sails into the net.
Options expire the third Friday of every month. It's a day of reckoning for options traders. When the option trader buys or sells contracts, think for a minute who's on the other side of the trade. With the most fluidly traded options, it can be the retail trader on both sides of the trade. But many stocks don't have the kind of contract volume on a daily basis that's necessary to match up retail buyers and sellers and you see "open interest" build.
Enter the market maker. Let's assume you buy 10 calls on ABC stock and the market maker sells you those calls. To appropriately manage risk, that market maker can then turn around and buy shares 10 calls represent shares as each call gives the purchaser the option to buy shares at some future point at a fixed strike price.
It's a familiar covered call strategy. Therefore, if ABC continues rising, the market maker is protected as they own the stock. But think about what happens if ABC moves higher for a period of time and builds a lot of net in-the-money call premium, then reverses suddenly and, in many cases, temporarily. The market maker owns shares, so they can potentially benefit from the gain leading up to options expiration Friday.
What if that market maker sells their long position, then begins to short ABC as options expiration Friday approaches? They effectively close out their long position with a gain no doubt.
Then as ABC mysteriously falls, market makers make money again on their new short position. As ABC falls during options expiration week, what happens to all of the net in-the-money call premium? It vanishes as the market maker rings the cash register again. It's an empty net goal. It's the market makers' version of the "perfect storm". It's a part of my overall strategy, not my entire strategy. There was net in-the-money put interest, which suggested that IWM small caps would have a gravitational pull higher in the very near-term.
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