Support and Resistance, How Real Is It?

First I enjoyed reading the enlightening posts on limit orders. For myself I would say I've made a modest number of trades using buy limit orders, perhaps 40 or so. Usually I'll bail out with a market order except I have sold options using limit orders about 5 times.


Well is there such a thing as support and resistance? I haven't quantified it but it does seem like stock prices "gravitate" around option strike prices to me.

Do you know what dynamic or delta hedging is? As a stock rises towards its strike price, near expiration, people who have sold calls buy stock to hedge. If a market is at all trendy, it may serve them to start buying half way between strike prices, and have almost a completely offsetting position the moment the strike price is crossed - meaning the buying stops.


Or, further from expiration, when gamma - the rate of change of delta (d1 = option price as a function of stock price) - is slower, stock and option prices may be offset by the amount of interest rates (because by buying a stock and selling a call and buying a put, you turn a synthetic future into a risk-free bond) the strike prices may actually be between the effective strike prices, so that if hedging activity tends to destabilize prices in the area of strikes, prices would more likely settle between strikes - which might coincide with rate-discounted strikes.


So far as simple support and resistance, sure, if there is an unsatisfied buyer (or correlated group of buyers) who appears - whatever that means - every time prices drop to where he is interested, chances are he will still be there again next time. More interesting, in markets where he actually is invisible, market-makers will pull together to let the price drop to where he is expected to show is face, just to confirm he is still there, and then they lift it with a fury before filling him.


Some people "trade for key levels" - on the statisticial basis that prices will be less stable between "information points" - and others view the market as a "pac man" - slowing chipping away at a key level (sounds more like "breakout" to me).


Burton Malkiel's discussion of technical analysis and key levels, in Random Walk, is as laughable as the rest of the book. But I'm no expert, study your own markets, and find out what "support" and "resistance" means for yourself. All I'm saying is there is plenty to be found wherever you look, and all of it worth pennies.


lorry

As soon as I find the time, I'm going to post some info about academic studies of market vs. limit orders that I've tracked down. However, I have heard that with options, you are much more likely to get worst-case execution using limit orders.

I know one thing that used to be really bad in options was you'd see a print at your price, but then they'd wait a bit to decide whether to give you your fill, or keep it for themelves. You try to force their hand by sending in a "cancel" - and then if the next tick is your way they say "you're out" but if goes against you they say "to late to can."


This is because you're only guaranteed a fill on a limit order if it trades through your price. But the reason people use limit orders in options is because they trade so infrequently. So you're stuck giving them a free ticket to lean on for Heaven knows how long.


I get angry just typing about it.


elroy