Options Wonderland

[~6979~]

MRCapital...thanks for the observation about the ~XJZLK~(~XLF~ 11 calls)...very nice observation that I missed...

I know I'll sleep a little better tonite seeing this activity...IMO,I think that action is covered-call selling...smart move for the big boys anticipating a big drop...

I went to covered-call school(the cows)...big block shareholders sell the calls against their shares to protect their holdings...

If the market was to drop tommorow,they have effectively reduced their basis by 11.2%(average ~XLF~ entry price of 12.50 /average call premium=1.40=11.2%)

(Im using the 12.5 average judging by the over 90 million shares traded from 2:30-3:30pm tues(after the FED announcement)

if the market stays flat or goes up tommorow...then they are forced to sell their shares @11 plus they keep their premium of 1.40(average)= a basis of 12.40(not that far from the current price)

if the market tanks big-time tommorow (under 11) then monday they will keep their shares & sell just as many [jan 9,10,11,or even 12 calls against their shares...reducing thier basis by another 5-15% depending on which calls they sell...

I may not be explaining this just right,but that protective action makes alot of sense...The covered-call strategy is a very powerful strategy indeed and I even use it sometimes if I smell a big dip coming but dont want to sell my shares,respectfully...(its just a little too conservative & slow for me...Im a gun slinger...LOL...

Alot of people may think that some big hedge fund outright bought all those calls...I seriously doubt that...the options exchange is the true buyer of most of those contracts...(they have too support the bid while respecting time value relative to price) to keep a market going...the market makers have to make a market...I suspect they didnt mind keeping the bid up so high with that kind of dumpage because the options expire saturday(1 day away) ,so its a safe market for them to buy...

think about it from the market makers perspective...if the market stays relatively flat,they have the right to buy all those shares @11,then turn around and dump them close to 12.58..plus their basis is reduced even further because of those little exchange fees we all pay...

And to answer your question about 'why in the money calls?'...only because the premiums were so good/high...1.40 may not seem like that much,but thats 11.2% protection with a 12.5 entry...and the thing is,we dont know the actual entry price of the call seller...they may have entered in the 10-11 $ range...that makes the premium worth even more...

good luck to you (hope this helped)