May 8, 2007 – The Marvel June 25 Puts have provided a good lesson that can be applied to making money in purchasing stocks. Again, I just dabble in options every now and then so by no means do I consider myself an expert in options. However, I do know enough to make money from playing options and enough to again know that most of the myths surrounding options is junk. Many of you are probably wondering what is going on with these puts. Yesterday during market hours, Marvel stock pulled back 2.8% at one point and the calls AND puts were both down $0.30! In fact, the puts hit my stop loss of 40% and in 99% of option plays, I would already have closed out this position. This is the 1% where, at least for now, I’m holding on.
Before market open yesterday, if you read my blog, I wrote that I would employ a “mental” stop loss, meaning that I wasn’t going to place a “hard” stop loss on the play but keep the stop loss point in my mind and decide what to do based upon the share price behavior during market hours. Because the price of the put contracts dropped on a heavily decreasing share price yesterday, and only because of this reason, I’m still holding on. I know that I wrote that it was important to note where Marvel shares closed, and not necessarily how low it may have dropped during the day, but the shares still closed lower than they opened yesterday. Here’s what I think is going on. As I said, these put options, even with my analysis, were much more speculative than the BIDU call options that soared 400% on good news exactly like call options are supposed to. Yet MVL put options have been tanking even as the share price falls, which isn’t supposed to happen.
As I said now, the historical pattern of Marvel shares has been well publicized, even being written up in major financial magazines such as Forbes. And if it appears in Forbes, that is about as mainstream as you can get. Time and time again, I advocate that the best way to make money (which I teach people how to do in my online revolutionary investment education course) is to uncover assets and stocks ignored by the masses that present phenomenal low risk- high reward setups. While the Marvel put options presented a low risk-high reward set up (just read my analysis in previous blogs), it hardly presented an “ignored” play. Unlike BIDU, where hardly anyone was engaging in BIDU calls, everyone and their grandmother seemed to know about these Marvel puts and the interest in them has been huge.
The market makers (option traders on the floor) can see this, and often, they try to turn the tide and shake people out of the market by doing so. So far, open volume on June puts has been very light while interest remains intensely high. With volume so light but interest so high, the market makers for these options have been able to control prices and are definitely trying to shake people out of the play. After all, who is going to take a loss on a position that should be showing a profit? When is the last time you saw a put option decrease sharply in price when its underlying stock dropped by almost 3% as happened with these Marvel Puts yesterday?
Just as with stocks, prices turn on volume, not interest. 100 million people can be interested in a stock, but if only 100 actually buy, the stock’s share price will not move much. The same is true of options. So for now, everyone in Marvel Puts is waiting for history to repeat itself and for the share price to tank, no one is closing out open positions, AND this is a very rare case where the market makers for these options all know what every investor who bought this option is thinking. Thus, they have been able to successfully squeeze the prices on these options. In fact, as I mentioned, they may even be engaging in trades to purposely manipulate the prices of these options as well just to shake investors out of their positions. Option traders that work on the floor are similar to hedge fund managers. They know almost nothing about the economy, the stock market, and they don’t care. They just play trends, and this is one trend that they spotted from miles away. Still, if share prices continue to fall, the options traders can’t keep up this game forever and they can’t fight a turning tide, so I hope that this is what eventually happens.
In this case, it’s just going to take more downward selling pressure on MVL stock and a heavy volume trading day in these options to get them turned around. I’d hate to have to execute a stop loss on this trade when it should, in theory, be in the black already. But then again, maybe this is a good lesson for me not to break my own rules of never purchasing anything (options included) that the thundering sheep herd already knows about despite how promising the setup appears to be.
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J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.
