Market players this morning (Thursday) were all stunned on being greeted by nearly NIS 100 million worth of demand. For a whole week, market players have been lulled by assessments that the expiry of the Maof options, this time, would be duller than ever, in absence of holdings of underlying assets (Maof shares) by the options players. What happened was the exact opposite. Never before in the history of the Maof has expiry been so tempestuous, once more giving rise to the same old allegations of this market being manipulated, and its technical aspects needing to be examined.
Option players came to market with exceptional demands, raising the opening Maof index by 2.4% to a level of 318.4 points (almost an all-time record for this index).
Only by a miracle did the opening index not close on a rise of 6% or 7% and at a new record price: in contrast to previous expiries, in which heavy supply on the part of options players met large countervailing demand on the part of institutional bodies (resulting in very well-balanced expiries), the heavy demand this time was not counter-balanced by equal supply, and option players’ demand met with no response.
This was evidently due, firstly, to the fact that the institutional bodies did not want to sell shares. Secondly, expectations of the expiry had been lowered. And thirdly, there was the basic assumption that had given rise to the assessments of the beginning of the week, and was evidently correct. This was that the option players possessed only a small amount of underlying assets, so that the natural encounter of option players wanting to sell with option players wanting to buy, did not take place this time.
The result was that until fifteen minutes before the opening index was determined, the theoretical index still stood at a 6%-7% advance; and only in the final moments did various market sellers spot the opportunity then presenting itself, and hastened to meet the option players’ demands.
What changed in the course of the week to enable the option players to take everybody by surprise as they did? The market today supplied various explanations. One, of a more run-of-the-mill nature, was that in the past two days, an opportunity arose in the Maof market, to roll over positions to May, giving rise to a need to purchase underlying assets on expiry day itself.
The next, more interesting version is as follows: today’s purchases by option players were not straightforward purchases transacted in order to close positions. These purchases were designed to influence the market and increase the profits of the buyers of call options.
It is noteworthy that yesterday, call options for March at exercise prices of 310 and 315, traded at very low prices (of NIS 6-13 for the 315 and 77-130 for the 310). These options, following the surprising forward leap of the determining index for the expiry, posted profits of thousands of percentage points within twenty-four hours. Whoever bought a call (315), for example, at NIS 6, today recorded a profit of more than NIS 300 (!).
Trading turnover in this option yesterday was only moderate (some 500 options), but in the call 310 (on which a profit of more than NIS 700 was posted by anyone who bought the option at an average price of NIS 100) there was a large turnover of some 6,500 options (equivalent to almost NIS 200 million in terms of underlying assets).
A quick computation will show that the 310 call buyers recorded a profit of more than NIS 5 million on yesterday’s purchases. Assuming that those buyers were the ones who bought the shares today, losing on them NIS 1.5 million on average, it emerges that the entire position came out NIS 3.5 million to the good. Undoubtedly, a substantial incentive for an attempt to influence stock market prices at expiry time.
Option market players who were not prepared for this eventuality, and who, today, sustained a heavy loss, have already raised a hue and cry. Some of them contacted "Globes", complaining that the opening index is easily influenced, and that, in that state of affairs "investing in the options market is tantamount to gambling on the lotto, because we cannot assess how crazily the index is going to act on expiry day".
We placed these allegations before Tel-Aviv Stock Exchange Director-General Sam Bronfeld, who requested that, after two years in which the Maof market has operated with barely a hitch (and after a number of particularly successful and well-balanced expiries), we should not hasten to modify long-established arrangements on account of one problematic expiry. He did, however, promise to check whether there was any substance to the claim that the opening index was subject to influence, and whether there were grounds for replacing it by another index, which would serve for determining expiry (for example, an average index of a longer trading period).
Published by Israel's Business Arena March 26, 1998