74 Day Letter vs. 73,000 Jan 14 calls @ $5

[krj00]

The powers that be have pegged Mnkd's share price at $5 and Max Pain through Jan 18th sits at the same $5.  The 74 day letter comes the last week in December, say 27th .  If clean, will it generate enough interest to move the share price up and eliminate the market makers ability to peg it at $5 for Jan expiration?

[liane]

That's the million dollar question!

[krj00]

There was the reverse conversion for 4000 shares at $11 for Dec 21 expiration that gave the market maker 400,000 shares to throw at the share price, but once we get some kind of catalyst, I'm thinking things move in a big way. I'm kind of considering a lottery ticket in the way of Jan 14, $7 calls for .09. 

[goyocafe]

Dec 6, 2013 10:26:19 GMT -5 liane said:

That's the million dollar question!

Depends who sold the calls. If they know someone at the FDA, count on a delay in the letter to ensure they expire worthless.

[krj00]

I dont think so. Those were mainly accumulated early on as leaps. Although your point is well taken, never trust gov't.

[liane]

As a holder of a some Jan14 5's, I can attest to the fact that huge numbers of them were sold for ~.20 early in 2012.

[alcc]

krj00,

Can you please explain to me how mkt makers can peg the shares at $5, and why they should? I have heard this type of hypothesis before and never understood the logic. I have asked people in the business and they dismiss the thesis. Consider those who wrote those $5 calls, whether they are private individuals or mkt makers (who, afaik, are always hedged). If they wrote covered calls, what do they have to gain by selling shares at the strike price? (Worse, and end up naked on the call)? If they wrote naked calls, wouldn't they be doubling down on the short side? I know mkt makers for sure won't do this.

Also, 73,000 contracts is nothing -- less than 2 days of avg volume. How can they peg the mkt for more than a few days anyways, regardless of motives? And then what?

[krj00]

Alcc,

I don't fully understand it myself but the reverse conversion is there in print. (copied and Pasted) In a typical reverse-conversion transaction, a brokerage firm short sells stock and hedges this position by buying its call and selling its put. Whether the brokerage firm makes money depends on the borrowing cost of the shorted stock and the put and call premiums, all of which may render a return better than the money market with very low risk. In the context of futures markets, a trader would be synthetically long and short the underlying futures while looking for arbitrage opportunities.  

As far as people in the business not admitting to it, to me,  is like a burglar saying, No I don't steal.

[alcc]

krj00,

I understand put-call price parity and arbitrage strategies re conversions/reverse conversions. Imo, that arbitrage is more theoretical than practically feasible. Maybe market makers can do that once in a blue moon. But I have absolutely no idea how you see this as being used right now by mkt makers to peg the underlying. (a) Why peg? Are you saying they are unhedged when they wrote those (likely mostly) out of money $5C? Not a chance. (b) And more important: where's the put-call volume if you see reverse conversion happening now? Option volume has been more dead than share price action.

If you appeal to conspiracy, then I suppose anything is possible.