OT-options expiration brief primer
Options Speculation Is What's Hurting FleetBoston
By James J. Cramer
04/17/2003 02:08 PM EDT
Click here for more stories by James J. Cramer
FleetBoston (FBF:NYSE - news - commentary - research - analysis) is not going down because of the specialist issue. Maybe a Fleet specialist front-ran GE (GE:NYSE - news - commentary - research - analysis) order flow. Maybe he didn't.
Nope, the stock is going down because someone is selling a ton of April 25 calls and he is pressuring the stock to close at its strike.
Let me explain.
First, today is expiration day. That means if you bought April 25 calls some time ago betting that perhaps FleetBoston would get a takeover bid, you are stuck with a difficult decision today: Do you exercise the calls and come in long a boatload of FleetBoston on Monday?
Or do you just blow them out and forget about the trade? (You could also roll them over, but I'm not seeing that.) I think speculators who buy this kind of contract are very unlikely to exercise and buy all that common. That's out of style with that kind of call owner/speculator.
So what do you do? You sell them. The common stock started at $25.30 today. The call was at about 30 cents, known as parity.
If you sell those calls, who buys them? One possibility is that the person who sold you the calls -- probably at a steep price when the takeover premium was hefty -- stayed short the calls. That person could now cover the short into your selling.
It's more than likely, though, that the people who sold them are long gone, unless you did it with a dealer with infinite patience.
Far more likely, the person who is buying them is buying them and selling common stock against them. That person would be long call, short stock. For most of the morning, before the ramp up, this looked like a darned good trade. You could buy a call for 25 or 30 cents and sell common for a like amount. If the common fell apart for the rest of the day, you have a risk-free short. Maybe it breaks to $24.50 and that's a home run.
More likely, though, all the call-buyer is doing is pressuring the common lower now. He's long call and banging out common and putting a lid on the stock. He's pressuring the stock to go out at $25. What happens at $25? He can exercise the call and flatten out vs. the sold common. If the stock goes below $25 on its own volition, he's got that risk-free short for the afternoon going again. Either way, the pressure is on for the stock to go out at the strike because the call-seller is unloading.
What can you do about these kinds of situations? I used to love these when I was at my hedge fund where I had tons of capital and could afford to take swings. I would see that the banks were all higher today except for Fleet. I would assess the specialist scandal: nil to earnings.
I'd then look at the puts and calls to see what they said. This one says there is a large call-seller pressuring the stock. I would then go buy the stock as close to that strike as I could, betting that it would pop when the pressure lifts on Monday. Of course, I wouldn't know how much the seller had, but I'd be willing to sit for a weekend on the stock if I liked it. And I like FleetBoston very much.
Is it an edge? Yes, a small one. More important, it helps explain that the stock is going down not because of the specialist fracas, but simply because someone speculated on the calls -- and got it wrong.
AI
Market Data 
Markets 
