Week Ending 02/15/13: $460.16 Feb 16, 2013 18:35:51 GMT -5
Post by greggthurman on Feb 16, 2013 18:35:51 GMT -5
Feb 16, 2013 15:47:34 GMT -5 @greggthurman said:Wouldn't Travis' thoughts on P/C Ratio be contra Max Pain Theory? After all, in Max Pain aren't Puts the magnet that hold an equity down, and Calls the magnet that draws them up?
Travis's theory is the opposite of what you state here. He believes that as Calls unwind, the Market Makers sell shares that they've bought to hedge the Calls, putting downward pressure on the stock. So the more Calls that are open, the more selling and downward pressure that needs to be overcome.
Puts would be the opposite: MM's sell short the stock when Puts are first opened to hedge their position. Then, as expirations near, they buy back their short positions putting upward pressure on the stock. So, the more Puts that are open, the more upward pressure there will soon be.
So therefore, he believes that a low P/C ratio will be a weight on the stock and a high P/C ratio will help lift the stock.
I'm still going to chart P/C Ratio vs Intraday High and Low, but there was something about the highlighted comment that wouldn't let me go.
Those aren't open market trades. They are fulfillments on contracts written previously, and would have the effect of offsetting the upward pressure created when they were written. Not all of that upward pressure would be offset however, because of Calls expiring worthless., unless those shares held as a hedge against contracts (now worthless) are sold at market. But wouldn't it be smart to use those shares (already paid for) to hedge new contracts being written?
If I was selling Calls against shares I owned, that's what I would do.
Seems to me that the extent of upward, or downward pressure, would be limited to the change in overall Open Interest (applied where written), which of late has been nominal at best.
Until I see some hierarchal evidence supporting this unwinding theory you can color me skeptical.