Options Expiration, closing right on the number--market manipulation?

[ctv1116]

I just wanted to hear from some of the derivatives experts, a common theory which is thrown around. Do market makers try to close a stock right on the strike price of the closest option? I ask this because the two stocks I've been following, EBAY and GOOG, closed at 40.01 and 280.00, respectively. Similarly, I was trading MRK after the big verdict, and they had Jim Cramer on, and he was talking about how the market makers were artificially holding up the MRK stock at around 29.25 because of the extensive amount of puts which had been traded earlier that day (the stock later plummeted to 28 and change at the close, and a little bit more after-hours). No one on the CNBC set could figure out what Cramer was talking about. Do market makers try to manipulate stocks with high open interest to expire exactly on the strike price?

[Sniper]

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Do market makers try to manipulate stocks with high open interest to expire exactly on the strike price?

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Of course they do!!

[SuitedPair]

If there are substantial number of options on a stock the nearest strike becomes a natural equilibrum.

When an investor buys a call (put) the market maker will short (buy) the underlying stock to hedge his book. As the stock price moves he will either buy or sell more, look up delta hedging.

If the stock is already close to a strike with a lot of options on each side (calls and puts) there will be a lot of trading as investors and market makers unwind the position.

[Martin]

It's often called MAX PAIN. An explanation of which you will find Here

Never tried to profit from the supposed trading strategy associated with it but I can tell you that the price action definately occurs.

[Paluka]

This is a natural effect of people hedging long gamma.

[tek]

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No one on the CNBC set could figure out what Cramer was talking about.

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Those TV talking heads at CNBC are great actors. They knew. [img]/images/graemlins/wink.gif[/img]