FMX | Connect (Reported 4/18/2011)
Series Overview
The purpose of this series is to help the reader better understand the risks and pitfalls of trading options and having a position at expiration. We will try to describe exactly what happens at expiration. The concepts here apply to all options markets, but we chose to focus on Silver because an interesting expiration is setting up presently. The upcoming expiry gives us an opportunity to discuss all the pieces of the option puzzle: the Greeks, market manipulation, Pin risk, and other factors.
Lesson #1
In futures markets where major participants are absent, options players dictate market movement for short periods of time. During this time the market may flat line, or it may have large, impulsive moves in either direction. What happens is determined by the strong-handed player, and sometimes his inclination to “game” the market.
The Easter Egg
Observe if you will, the 6 days prior to expiration of Comex May Silver options.
April 21st, Holy Thursday: day before a holiday
April 22nd: Good Friday: CME Closed
April 23rd,Easter Saturday: Markets Closed
April 24th,Easter Sunday: Markets Closed
April 25th, Easter Monday: LME Closed (Largest Physical Bullion Exchange Worldwide)
April 26th, Tuesday: May Options Expiration CME
One may ask, what does the above imply? The above implies that normal liquidity will not be present for the last 5 days before expiration. Sunday Evening US time is usually quite liquid during London hours, but will not be this week. Monday will also be a liquidity ghost town, as LME players will be out. It is doubtful that many US futures liquidity providers will be in the day after Easter either. This is a market ripe for an event.
Throughout this week and next, we will attempt to break down the factors influencing the outcome of this expiration as a proxy for understanding commodity options risk in general. It will include:
· The players and their biases
· Option Greeks demystified
· How to spot when a market is ripe for “management”, like above.
· Regulatory factors enabling this behavior.
About the Author: Vincent Lanci is a 22-year veteran of the commodity option markets. He started on Wall Street at Lehman Brothers and is a former floor trader and energy fund manager. He currently manages Echobay Partners, a private equity firm specializing in commodity and exchange related investments.
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