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(Quartz)   Why did Apple close at exactly $500? TL;DR version: We are all pawns of the 1%, and that includes Apple   ( divider line
    More: Obvious, call options, put options, the local, trading day, stock options  
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3093 clicks; posted to Business » on 19 Jan 2013 at 11:45 AM (5 years ago)   |   Favorite    |   share:  Share on Twitter share via Email Share on Facebook   more»

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2013-01-21 01:38:06 AM  

Manfred J. Hattan:
It's an options expiration thing. Finishing right on the nose is actually pretty rare but often stocks trade closer to their options' closest strike price than it might have absent the expiration as traders either hedge or close out their options positions and/or bulk up/lighten their stock exposures to cause/prevent options exercises. Most investors benefit from this as it reduces volatility on option expiration day.

So in this case, the stock trading around $500 meant that, absent news, it was likely to stay closer to the $500 exercise price than to the next exercise prices of $505 or $495, even if those stocks in the same sector with relatively small options exposure moved up or down. Do that lots of times and you'll hit the price on the nose slightly more often than chance.

What he said.

This isn't manipulation. It's a natural phenomenon that's taken place ever since listed options started trading, which was 30-40 years ago. It happens because the guy (today, a computer) who makes the market is trying to have enough stock on hand that he can sell to anyone who wants to buy, and simultaneously buy (or sell) enough options to make sure that he doesn't risk losing any money on the stock he happens to hold from moment to moment. That's a simple explanation of delta neutrality. Going further requires some math (Warning: PDF, there's math). Even if you gloss over the math, the graphs in that powerpoint presentation make it pretty clear that optionable stocks have a tendency to get pinned to the nearest strike price.

Nobody tries to make this happen, it actually sucks for any AAPL market maker. At $500.00, the person making the market in AAPL (and today, the firm that owns the robot) has no way of knowing how many of its contracts are going to be exercised on Friday after the market close, and must spend all three days of the weekend hoping that neither a war breaks out, nor an earthquake in China that flattens half of AAPL's factories... but they also have to hope that peace doesn't break out, and that some politician doesn't do anything that might cause the market to skyrocket tomorrow. Depending on how the holders of the options flip their coins, they could wake up Tuesday morning holding a million shares of AAPL, or short a million shares of AAPL, and either of those situations could be disastrous.

If it sucks, why does it happen anyway? It happens because in liquid names, the markets are actually pretty efficient. Everyone's trying to get delta neutral, and the net effect of every market participant trying to hedge away as much risk as possible is what pins the price of the stock to one of the nearest strikes.

The only thing that's changed recently is that instead of it happening every third Friday (normal options expiration date in the US), it can now happen every Friday, because the options markets now offer weekly options contracts for people who need short-term hedges. Every Friday's an expiration day, but the third Friday of the month is still the most likely time of the month for a stock to get pinned to the strike.

tl;dr: That website's designer oughta be fired, but the actual article covered it pretty well. No conspiracy, just a natural side effect of a healthy and liquid market that's been going on for decades.
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