[tucciotrader]

I have a few difficulties understandig why the market maker is not going to quote the call option at price strike below the dollar...what I don't uderstand is that the security is trading at 0,38$ on the nasdaq and its call options is trading at price strike >1$ and the open interests for this call options is huge (yet, I don't know for how many stocks a single call contract accounts for...maybe 1k?)

Why is anybody buying call options instead of buying the security itself?

http://finance.yahoo.com/q/op?s=CTIC&m=2011-01
http://finance.yahoo.com/q/op?s=CTIC&m=2012-01

Strike: 1.00
Last: 0.02
Open Int: 47,331
Expire at close Friday, January 21, 2011
--
Strike: 1.00
Last: 0.08
Open Int: 73,660
Expire at close Friday, January 20, 2012

thanks

[SIUYA]

Q: "I have a few difficulties understandig why the market maker is not going to quote the call option at price strike below the dollar"
A: Most strikes, expiries etc are set by the exchange. Maybe they have rules or have decided not to list new option strikes in these months.....maybe there are other shorter dated options that are less than a $1 strike that are available.

Q"...what I don't uderstand is that the security is trading at 0,38$ on the nasdaq and its call options is trading at price strike >1$ and the open interests for this call options is huge "
A...These may have traded earlier in the year when the strikes were at the money.

(yet, I don't know for how many stocks a single call contract accounts for...maybe 1k?)
A.....check on the appropriate exchange for that instrument.


Q..."Why is anybody buying call options instead of buying the security itself?"
A....Risk v return. The stock has been a poor performer over the year.... risking 2c v 39 c seems worth it depending on the view. What if the stock rallies to 80c the options might go to 6-8 c. As in every trade there are trade offs - this is the fun part of option trading
Are they all buying options......or are they simply buying them back as they are short them?

Apart from the varieties of options available, the education requires to trade them, there is also the added element of being able to understand what has happened in the history of the option trading in an instrument. This in itself can provide a lot of information.

[tucciotrader]

Ok, thanks. Now, it makes more sense to me!

That could merely be a buy back as they are short them.

I wonder what "Open interest" means. Does that mean "traded" or just "bought" ?? I mean, if call options are being naked shorted, say, hitting the bid...someone must be buying them...right? that could be the Market Maker as well...will that increment the value of Open Int?

How can I tell when an call option is being bought or sold??

http://finance.yahoo.com/q/op?s=CTIC&m=2011-01

I'm sorry, I must admit I'm quite new to option trading...

[SIUYA]

1) How to tell if a call option is being bought or sold? it not really a matter of this, as for every buyer there is a seller. The question is How do you know if the option is being open or closed? Is it a new or initiating trade?
Watch the open interest, ideally if its decreasing its being closed out. Realistically you either need to watch to know if a client is closing out the option, or rolling it. There is a lot of information required to be tracked for this. The easiest is to watch for changes in the open interest of a series.

2) Open Interest - you had best check with the exchange how best they operate the measurement of this. But in a simplistic measure, check out Open Interest Definition

Now while you will only be interested in what the exchange numbers are reported as.......as food for thought, take it one step further and think about it terms of an individual traders open interest.
(assume all in the same strike, series, instrument etc)
Day 1.... buy 10 contracts,
Day 2.....sell 5 contracts
Day 3......buy 2 contracts
Day 4......sell 2 contracts

Whats the open interest? +10-5+2-2=5

(now if you dont want to get confused stop reading.....otherwise as an interesting often not known element of the option market)....

Or can a trader have +12 longs open and -7 shorts open?

Depending on the exchanges and the availability to do this..... both options are possible and you want to check how the exchange accounts for this. Usually they would still only show +5 open.
But it can get confusing when expiry comes around, as the volumes may not replicate what the open interest is.
This is because of choice to keep option positions open that are "back to back", and not closed out. (It involves extra accounting and costs but can be worth it.)
So on expiry day (assuming the options are ITM), the option trader chooses to exercise both the longs and the shorts, and the volume will be expiry day trades of +12, and selling 7.

All I would say is check exactly how the exchange calculates it if you are going to use it.

[tucciotrader]

Originally Posted by SIUYA »

1) How to tell if a call option is being bought or sold? it not really a matter of this, as for every buyer there is a seller. The question is How do you know if the option is being open or closed? Is it a new or initiating trade?

well, if it's an active trade..the short seller might be hitting the bid whereas the market maker is forced to quote some contracts (both at bid & ask)...so, the trader could be short selling call contracts to the market maker. thus, increasing the open int

Originally Posted by SIUYA »

Watch the open interest, ideally if its decreasing its being closed out. Realistically you either need to watch to know if a client is closing out the option, or rolling it. There is a lot of information required to be tracked for this. The easiest is to watch for changes in the open interest of a series.

that was my take too! Needless to say, changes in the open int. series are not provided. At any rate, I noticed that the open int. have increased a lot, lately. So..offhand, I'd say that call contracts are being bought (long) insteadof bought back (short close)

Yet, that could be new shorts beign opened by hitting the marker maker at bid as the last traded price is equal to the bid!!

Originally Posted by SIUYA »

All I would say is check exactly how the exchange calculates it if you are going to use it.

Still, I wonder why the market maker is not quoting options with price strike below 1$ as well as why are call contracts being bought at price strike 1$ while the underline security is trading at 0,38$??

I have both good and bad fellings.

Good: the security might be trading over 1$ in the near future.
Bad: a Reverse/Split is around the corner...

Thanks

[SIUYA]

Originally Posted by tucciotrader »

I have both good and bad fellings.

Good: the security might be trading over 1$ in the near future.
Bad: a Reverse/Split is around the corner...

Thanks

I did a little bit of rummaging around, and learnt something today....I got onto the NASDAQ legal and compliance area and realised there is a lot of minimum requirements to stay listed. Maintaining a share price above $1 is one of them..... thanks.

Also found this.....
The 5 Dumbest Things on Wall Street: Sept. 17 - TheStreet

they sound like they are lining their own pockets and it will not be getting back above $1

[tucciotrader]

so, in a nutshell, those who are shorting the calls are making millions while the market maker is paying them that millions! unless the call option is in the money by the expire day...is tha correct?

[SIUYA]

Originally Posted by tucciotrader »

so, in a nutshell, those who are shorting the calls are making millions while the market maker is paying them that millions! unless the call option is in the money by the expire day...is tha correct?

thats a big assumption.....and you know what happens when you assume!

shorting options for 2cents is like picking up pennies in front of a steamroller. It seems easy until the day you trip and get flattened.
As I said the stock may only need to rally to 80c and those options may be worth a lot more.
Whilst the articles suggest the management are sub par. What if the company was worth something to another company without the current management. The stock might be worth $1 plus.....who knows.
Approach it on a risk reward basis.....sell at your own risk for those 99 times out of 100 you get it right.....just watch out for the 1 time you get it wrong.

Also are you sure the market makers are buying them? maybe market makers are trading with other market makers, or clients with other clients? Maybe they are part of a roll, another hedge....Dont assume anything