It is option expiration week, and it is time to focus on manipulation by option market makers.
As I have written before, when option market makers like Goldman Sach sell call and put options, they are really selling insurance against price swings. To avoid paying up on this insurance, Goldman and other option sellers manipulate the markets around expiration dates to insure that most of these option contracts expire worthless.
The option sweet spot
The option sweet spot is the price range where option contracts will expire with the lowest possible value for any given security. This is the area of maximum profit for Goldman Sach and other option sellers.
GLD' s August option sweet spot
You can figure out where the option sweet spot by examining where call and put open interest is distributed among different strike prices (read the wikipedia' s enty on options for a basic understanding of how options work). Below is distribution of GLD' s option open interest as of the close of the market Tuesday.
August Open Interest for GLD | ||
Strike Price | Calls | Puts |
50 | 33 | 0 |
51 | 11 | 0 |
52 | 20 | 0 |
53 | 0 | 0 |
54 | 0 | 0 |
55 | 0 | 0 |
56 | 10 | 0 |
57 | 0 | 0 |
58 | 0 | 0 |
59 | 0 | 0 |
60 | 0 | 0 |
61 | 0 | 0 |
62 | 0 | 0 |
63 | 0 | 0 |
64 | 1 | 0 |
65 | 2 | 0 |
66 | 1 | 0 |
67 | 0 | 0 |
68 | 0 | 0 |
69 | 0 | 0 |
70 | 21 | 231 |
71 | 11 | 0 |
72 | 20 | 10 |
73 | 10 | 0 |
74 | 10 | 460 |
75 | 45 | 63 |
76 | 41 | 16 |
77 | 19 | 377 |
78 | 50 | 201 |
79 | 12 | 310 |
80 | 466 | 6166 |
81 | 538 | 1130 |
82 | 171 | 1321 |
83 | 325 | 1134 |
84 | 582 | 6852 |
85 | 526 | 7953 |
86 | 2216 | 5931 |
87 | 1796 | 11132 |
88 | 1117 | 17520 |
89 | 933 | 8004 |
90 | 8868 | 21055 |
91 | 11061 | 7524 |
92 | 9281 | 6417 |
93 | 9654 | 13422 |
94 | 13942 | 7138 |
95 | 24889 | 4860 |
96 | 13310 | 3325 |
97 | 17003 | 983 |
98 | 5338 | 1140 |
99 | 8169 | 302 |
100 | 12908 | 10010 |
101 | 2851 | 189 |
102 | 4258 | 157 |
103 | 2001 | 121 |
104 | 1528 | 97 |
105 | 1777 | 30 |
106 | 789 | 55 |
107 | 2548 | 38 |
108 | 542 | 4 |
109 | 278 | 20 |
110 | 6257 | 13 |
111 | 310 | 2 |
112 | 1114 | 12 |
113 | 15099 | 3 |
114 | 119 | 3 |
115 | 726 | 2 |
116 | 118 | 2 |
117 | 1074 | 10 |
118 | 521 | 0 |
119 | 641 | 2 |
120 | 12676 | 0 |
121 | 617 | 0 |
122 | 94 | 0 |
123 | 171 | 0 |
124 | 86 | 0 |
125 | 4413 | 0 |
126 | 5110 | 0 |
127 | 0 | 0 |
128 | 126 | 0 |
129 | 79 | 0 |
130 | 10 | 0 |
131 | 10 | 0 |
132 | 10 | 0 |
133 | 4126 | 0 |
134 | 25 | 0 |
135 | 21 | 0 |
136 | 100 | 0 |
137 | 114 | 0 |
138 | 10 | 0 |
139 | 10 | 0 |
140 | 20 | 0 |
141 | 0 | 0 |
142 | 10 | 0 |
143 | 20 | 0 |
144 | 10 | 0 |
145 | 25 | 0 |
146 | 10 | 0 |
147 | 10 | 0 |
148 | 0 | 0 |
149 | 0 | 0 |
150 | 0 | 0 |
Next, the table below shows the value of GLD options at different expiration prices, calculated using open interest info above. I have highlighted GLD' s option sweet spot, the price range where option contracts will expire with the lowest possible value.
Expiration Value Of GLD Options | |||
Expiration | Value of | Value of | Value of |
Price | Call Options | Put Options | All Options |
@ 50 | 0 | 579,715,500 | 579,715,500 |
@ 51 | 3,300 | 565,140,800 | 565,144,100 |
@ 52 | 7,700 | 550,566,100 | 550,573,800 |
@ 53 | 14,100 | 535,991,400 | 536,005,500 |
@ 54 | 20,500 | 521,416,700 | 521,437,200 |
@ 55 | 26,900 | 506,842,000 | 506,868,900 |
@ 56 | 33,300 | 492,267,300 | 492,300,600 |
@ 57 | 40,700 | 477,692,600 | 477,733,300 |
@ 58 | 48,100 | 463,117,900 | 463,166,000 |
@ 59 | 55,500 | 448,543,200 | 448,598,700 |
@ 60 | 62,900 | 433,968,500 | 434,031,400 |
@ 61 | 70,300 | 419,393,800 | 419,464,100 |
@ 62 | 77,700 | 404,819,100 | 404,896,800 |
@ 63 | 85,100 | 390,244,400 | 390,329,500 |
@ 64 | 92,500 | 375,669,700 | 375,762,200 |
@ 65 | 100,000 | 361,095,000 | 361,195,000 |
@ 66 | 107,700 | 346,520,300 | 346,628,000 |
@ 67 | 115,500 | 331,945,600 | 332,061,100 |
@ 68 | 123,300 | 317,370,900 | 317,494,200 |
@ 69 | 131,100 | 302,796,200 | 302,927,300 |
@ 70 | 138,900 | 288,221,500 | 288,360,400 |
@ 71 | 148,800 | 273,669,900 | 273,818,700 |
@ 72 | 159,800 | 259,118,300 | 259,278,100 |
@ 73 | 172,800 | 244,567,700 | 244,740,500 |
@ 74 | 186,800 | 230,017,100 | 230,203,900 |
@ 75 | 201,800 | 215,512,500 | 215,714,300 |
@ 76 | 221,300 | 201,014,200 | 201,235,500 |
@ 77 | 244,900 | 186,517,500 | 186,762,400 |
@ 78 | 270,400 | 172,058,500 | 172,328,900 |
@ 79 | 300,900 | 157,619,600 | 157,920,500 |
@ 80 | 332,600 | 143,211,700 | 143,544,300 |
@ 81 | 410,900 | 129,420,400 | 129,831,300 |
@ 82 | 543,000 | 115,742,100 | 116,285,100 |
@ 83 | 692,200 | 102,195,900 | 102,888,100 |
@ 84 | 873,900 | 88,763,100 | 89,637,000 |
@ 85 | 1,113,800 | 76,015,500 | 77,129,300 |
@ 86 | 1,406,300 | 64,063,200 | 65,469,500 |
@ 87 | 1,920,400 | 52,704,000 | 54,624,400 |
@ 88 | 2,614,100 | 42,458,000 | 45,072,100 |
@ 89 | 3,419,500 | 33,964,000 | 37,383,500 |
@ 90 | 4,318,200 | 26,270,400 | 30,588,600 |
@ 91 | 6,103,700 | 20,682,300 | 26,786,000 |
@ 92 | 8,995,300 | 15,846,600 | 24,841,900 |
@ 93 | 12,815,000 | 11,652,600 | 24,467,600 |
@ 94 | 17,600,100 | 8,800,800 | 26,400,900 |
@ 95 | 23,779,400 | 6,662,800 | 30,442,200 |
@ 96 | 32,447,600 | 5,010,800 | 37,458,400 |
@ 97 | 42,446,800 | 3,691,300 | 46,138,100 |
@ 98 | 54,146,300 | 2,470,100 | 56,616,400 |
@ 99 | 66,379,600 | 1,362,900 | 67,742,500 |
@ 100 | 79,429,800 | 285,900 | 79,715,700 |
@ 101 | 93,770,800 | 209,900 | 93,980,700 |
@ 102 | 108,396,900 | 152,800 | 108,549,700 |
@ 103 | 123,448,800 | 111,400 | 123,560,200 |
@ 104 | 138,700,800 | 82,100 | 138,782,900 |
@ 105 | 154,105,600 | 62,500 | 154,168,100 |
@ 106 | 169,688,100 | 45,900 | 169,734,000 |
@ 107 | 185,349,500 | 34,800 | 185,384,300 |
@ 108 | 201,265,700 | 27,500 | 201,293,200 |
@ 109 | 217,236,100 | 20,600 | 217,256,700 |
@ 110 | 233,234,300 | 15,700 | 233,250,000 |
@ 111 | 249,858,200 | 12,100 | 249,870,300 |
@ 112 | 266,513,100 | 8,700 | 266,521,800 |
@ 113 | 283,279,400 | 6,500 | 283,285,900 |
@ 114 | 301,555,600 | 4,600 | 301,560,200 |
@ 115 | 319,843,700 | 3,000 | 319,846,700 |
@ 116 | 338,204,400 | 1,600 | 338,206,000 |
@ 117 | 356,576,900 | 400 | 356,577,300 |
@ 118 | 375,056,800 | 200 | 375,057,000 |
@ 119 | 393,588,800 | 0 | 393,588,800 |
@ 120 | 412,184,900 | 0 | 412,184,900 |
@ 121 | 432,048,600 | 0 | 432,048,600 |
@ 122 | 451,974,000 | 0 | 451,974,000 |
@ 123 | 471,908,800 | 0 | 471,908,800 |
@ 124 | 491,860,700 | 0 | 491,860,700 |
@ 125 | 511,821,200 | 0 | 511,821,200 |
@ 126 | 532,223,000 | 0 | 532,223,000 |
@ 127 | 553,135,800 | 0 | 553,135,800 |
@ 128 | 574,048,600 | 0 | 574,048,600 |
@ 129 | 594,974,000 | 0 | 594,974,000 |
@ 130 | 615,907,300 | 0 | 615,907,300 |
@ 131 | 636,841,600 | 0 | 636,841,600 |
@ 132 | 657,776,900 | 0 | 657,776,900 |
@ 133 | 678,713,200 | 0 | 678,713,200 |
@ 134 | 700,062,100 | 0 | 700,062,100 |
@ 135 | 721,413,500 | 0 | 721,413,500 |
@ 136 | 742,767,000 | 0 | 742,767,000 |
@ 137 | 764,130,500 | 0 | 764,130,500 |
@ 138 | 785,505,400 | 0 | 785,505,400 |
@ 139 | 806,881,300 | 0 | 806,881,300 |
@ 140 | 828,258,200 | 0 | 828,258,200 |
It is probably easiest to see GLD' s August option sweet spot when the value of GLD options at different expiration prices is graphed out, as seen below. Notice how rapidly the options go up in value to either side of the option sweet spot.
From GLD' s option sweet spot, Goldman and other option sellers want gold prices to be between 920 and 950 at the close of the market Friday. Seeing as they probably not going to lose control of the gold market in the next three days, it is a good bet that gold prices will end up where Goldman wants them.
USO August option sweet spot
Below is the August option sweet spot for USO (an ETF that tracks oil futures). Looks like option market makers are betting on oil closing between 67 and 70 on Friday.
Experiment with August' s expiration date
I am curious to see just how closely Goldman and other option sellers can control the market, so I am going to try a little experiment. Below is a list of securities together with their August Option Sweet Spot. After the close of the market Friday, I will update this entry with the closing price of each security and see how well they correlated to option sweet spots.
Symbol: GLD
August Option Sweet Spot: 91 - 94
Tuesday's closing price: 92.06
Friday' s closing price: ???
Symbol: USO
August Option Sweet Spot: 35 - 37
Tuesday's closing price: 36.86
Friday' s closing price: ???
Symbol: MOS
August Option Sweet Spot: 49 - 50
Tuesday's closing price: 52.68
Friday' s closing price: ???
Symbol: DBA
August Option Sweet Spot: 24 - 26
Tuesday's closing price: 25.4
Friday' s closing price: ???
Symbol: NEM
August Option Sweet Spot: 40 - 41
Tuesday's closing price: 39.23
Friday' s closing price: ???
Symbol: JRCC
August Option Sweet Spot: 15 - 16
Tuesday's closing price: 16.41
Friday' s closing price: ???
Symbol: WMT
August Option Sweet Spot: 49.5 - 50.5
Tuesday's closing price: 51.36
Friday' s closing price: ???
Symbol: HES
August Option Sweet Spot: 50 - 52
Tuesday's closing price: 50.62
Friday' s closing price: ???
Symbol: GOOG (updated: corrected a calculation mistake)
August Option Sweet Spot: 439 - 447
Tuesday's closing price: 445.28
Friday' s closing price: ???
Symbol: CSCO
August Option Sweet Spot: 20.5 - 21
Tuesday's closing price: 21.01
Friday' s closing price: ???
Symbol: GS
August Option Sweet Spot: 155 - 160
Tuesday's closing price: 160.48
Friday' s closing price: ???
Symbol: JPM
August Option Sweet Spot: 34 - 35
Tuesday's closing price: 41.7
Friday' s closing price: ???
Symbol: SLV
August Option Sweet Spot: 13 - 14.2
Tuesday's closing price: 13.72
Friday't closing price: ???
Symbol: UUP
August Option Sweet Spot: 22.6 - 23.3
Tuesday's closing price: 23.53
Friday't closing price: ???
Conclusion: I will write the conclusion to this entry on Friday.
--------------------------------
UPDATE: August 23, 2009 2:27 AM
One of my readers emailed me the closing values to update this entry (Thanks David)
Here's the closing values to update your chart from Tuesday, if you haven't done it yet. I checked the values from two online sources (Fidelity & Quote.com).
Symbol: GLD
August Option Sweet Spot: 91 - 94
Tuesday's closing price: 92.06
Friday's closing price: 93.65
(in sweet spot)
Symbol: USO
August Option Sweet Spot: 35 - 37
Tuesday's closing price: 36.86
Friday's closing price: 38.23
(above sweet spot)
Symbol: MOS
August Option Sweet Spot: 49 - 50
Tuesday's closing price: 52.68
Friday's closing price: 54.46
(above sweet spot)
[Wow, MOS managed to finish above its option sweet spot despite the CFTC' s drastic action on Wednesday (see end of this blog entry).]
Symbol: DBA
August Option Sweet Spot: 24 - 26
Tuesday's closing price: 25.4
Friday's closing price: 25.17
(in sweet spot)
[Here is a key question: would DBA (ETF which tracks grain futures) have finished in the sweet spot if the USDA wasn' t insanely overestimating grain production and if the CFTC hadn' t taken regulatory action this week (again, see end of this blog entry)?]
Symbol: NEM
August Option Sweet Spot: 40 - 41
Tuesday's closing price: 39.23
Friday's closing price: 40.84
(in sweet spot)
Symbol: JRCC
August Option Sweet Spot: 15 - 16
Tuesday's closing price: 16.41
Friday's closing price: 17.27
(above sweet spot)
Symbol: WMT
August Option Sweet Spot: 49.5 - 50.5
Tuesday's closing price: 51.36
Friday's closing price: 51.36 [Didn' t move much did it?]
(above sweet spot)
Symbol: HES
August Option Sweet Spot: 50 - 52
Tuesday's closing price: 50.62
Friday's closing price: 52.93
(above sweet spot) [barely missed]
Symbol: GOOG
August Option Sweet Spot: 419 - 422 (Tuesday)
August Option Sweet Spot: 439 — 447 (Wednesday)
August Option Sweet Spot: 443 — 453 (Thursday)
Tuesday's closing price: 445.28
Friday's closing price: 465.24
(in sweet spot)
[The google' s sweet spot moved upwards in the three last days. Someone sold 4223 puts with a strike price of 450 between Turesday and Thursday. I assumed they continued to do so on Friday]
Symbol: CSCO
August Option Sweet Spot: 20.5 - 21
Tuesday's closing price: 21.01
Friday's closing price: 22.19
(above sweet spot)
Symbol: GS
August Option Sweet Spot: 155 - 160
Tuesday's closing price: 160.48
Friday's closing price: 163.51
(above sweet spot)
Symbol: JPM
August Option Sweet Spot: 34 - 35
Tuesday's closing price: 41.7
Friday's closing price: 43.66
(above sweet spot)
[Perhaps the reason GS and JPM missed their sweet spot was that some of the call options were written by regular investors who were bearish on financials (meaning the real sweet spot of Goldman was higher than it appeared)]
Symbol: SLV
August Option Sweet Spot: 13 - 14.2
Tuesday's closing price: 13.72
Friday't closing price: 13.92
(in sweet spot)
Symbol: UUP
August Option Sweet Spot: 22.6 - 23.3
Tuesday's closing price: 23.53
Friday't closing price: 23.23
(in sweet spot)
Conclusion: 6 / 14 finished in their option sweet spots, and 8 / 14 finished above their option sweet spot. Interestingly NONE of the 14 securities selected finished BELOW their option sweet spot (inflationary pressure?). In any case, if you trade stocks, I would advise you to pay attention to the option sweet spot of whatever your trading.
Here are two sites which will calculate the option sweet spot for you.
http://www.optionpain.org/option/OptionPain/Option-Pain.php
http://www.optionistics.com/f/strike_peg
--------------------------------
On a final note I want to draw attention to what the CFTC did Wednesday.
marketwatch reports that CFTC withdraws hedging exemption of Deutsche fund.
(emphasis mine) [my comment]
Aug 19, 2009, 2:17 p.m. EST
CFTC withdraws hedging exemption of Deutsche fund
Banks Deutsche Bank AG PowerShares DB Commodity Index Tracking Fund
By Laura Mandaro
SAN FRANCISCO (MarketWatch) -- The Commodity Futures Trading Commission said Wednesday it had withdrawn a no-action letter that allowed a Deutsche Bank index fund to avoid speculative position limits in grain futures. A May 2006 exemption to DB Commodity Services, a unit of Germany's Deutsche Bank (DB 66.20, +1.05, +1.61%) , allowed its DB Commodity Index Tracking Master Fund (DBC 22.80, -0.16, -0.70%) to exceed speculative limits on corn and wheat futures. The fund aims to provide investors with broad exposure commodities. The CFTC also withdraw a similar no-action letter granted in Sept. 2006 to a commodity-pool operator employing a proprietary investment strategy in corn, soybean and wheat futures. The CFTC said the withdrawal of the no-action letters was "very specific and limited" and doesn't affect its other regulatory positions.
From Nogger' s blog:
Thursday, 20 August 2009
Early Morning Thoughts
The overnight markets are mixed, with beans higher, corn up a tad and wheat a little lower.
China bought 205,000 MT of new crop US beans last night. The USDA will report on weekly export sales at 13.30 BST. For soybeans estimates range from 300,000 to 700,000 MT, for corn 700,000 to 1,000,000 MT, and for wheat 350,000 to 550,000 MT.
An announcement by the CFTC that it was going to get tough and enforce the 6,500 contract limit on two companies that regularly flouted regulations has got the wheat market in a panic. [The CFTC doing something to send markets into a panic right before option expiration? A panic in the right direction to avoid losses to option market makers? Where have we seen this before... (SEC's two short sale bans last year also happened right before option expiration.]
The companies concerned, Deutsche Bank and one other un-named entity will now no longer be able to legally evade the trading limits for wheat. One report suggests that the two are currently long of 60,000 contracts. [which they might have had to sell right before option expiration. The threat alone of them being forced to sell is sure to have driven down wheat]
My reaction: By withdrawing Deutsche Bank' s contract limit, the CFTC sent agricultural futures into a panic just before Friday' s option expiration. Through this regulatory action, the CFTC safeguarded Goldman' s profits by forcing wheat futures to where they were supposed to be (inside their option sweet spot).
This just shows why you shouldn' t bet against Goldman Sach. If things don' t go their way even, they manipulate the market (28% jump in wheat open interest). If this isn' t enough, they can recruit the USDA and mainstream media to print information to scare investors in the right direction (see my other entries about the USDA' s recent propaganda). If even this doesn' t work, then they can always get the SEC or CFTC to take drastic action during option expiration week, like last year' s two short sale bans or last week' s announcement about Deutsche Bank' s trading limit. With their complete freedom to manipulate the market and the absolute loyalty of regulatory institutions, how can Goldman possibly lose?
Great test, What about SLV?
You can also google the words 'strike pegger' or 'max pain' and find out this too.
Its called pinning the strike. Its what market makers can do. The stock doesn't always hit the strike but many times it does.
sounds fun
Also check Street Smart, an issue of Goldman Sachs.
And nice research!
Yann
To predict the sweet spots, Goldman employs highly complex computer programs written by genius scientists (so we all have heard). An ordinary investor cannot compete with that.
Thanks for the research. I too would be most gateful on your view on the sweet spot for silver. Cheers
Selling options is very profitable and you don't have to be a big broker that can move the market. For the life of me I don't understand why people buy options.
I found another site that also posts the option prices. They call it Option Mark, I don't know what the difference is between all of them.
Its http://www.hotstockmovers.com and its under the Option Mark