Saturday, November 7, 2009

Microvision: Market Makers… Ready… Smile… Action

If you have watched the Microvision stock price action over the last few years, you will come to the same conclusion that I have...

"The market maker needs volatility to continue making market for a stock like MVIS… where there are currently more retail investors and also where the stock is tied to Russell 2000 index. In other words, the MM is dealing with very unpredictable buying and selling patterns for MVIS stock… and the options are very thinly traded."

This is what the MM is dealing with…

During times when everyone wants to buy the stock, the market maker sells from inventory and sells the excess [of what is not matched by a seller] and ends-up more short stock than he really wants to... but is able to buy Calls if and when available. Buying Calls may be under his control, however, he still needs the counter party [a willing seller of Calls]. So, the MM ends-up short MVIS stock without a hedge. And that’s what happened when the stock moved from $3.30 to $5.52 in matter of 4 weeks [from 9/3 thru 9/30]… and on some very heavy volume. This is when FUD mongers go to work and create selling pressure first as profit taking and then accelerated selling based on fear, uncertainty and doubt. When the mission is accomplished, and FUD related selling is in full force, the MM covers and starts to build inventory for the next round of buying from the investor community… either natural buying pressure or forced by act of GOD [greed, optimism and deception].

It took FUD mongers, with help from our trader brethrens, just 7-trading days [from 10/20 thru 10/27] to bring the MVIS stock down to $3.70 from $5.52. Sometimes it makes you wonder how many of these FUD managers exist on the Yahoo Message Board for MVIS stock. I’m sure that those fellow long term investors, who like to trade for the sake of a few pennies, do more damage to their cause and then wonder: Who’s done it?

On the flip side, in times when everyone wants to sell, the market maker buys the excess [of what is not matched by a buyer] and ends-up with more inventory than he really wants to hold and there is no way [in case f MVIS stock] for him to hedge this position by buying Puts… because no one in their right mind wants to sell Puts on MVIS. So, the MM ends-up with tons of shares of MVIS and basically no hedge. And that’s what has happened over a 7-trading day period [from 10/20 thru 10/27] when the stock plunged from $5.52 to $3.70 in matter of 9 days… and on some very heavy volume.

But wait!!!

Wasn’t the selling from 10/20 thru 10/ 27 [when the stock plunged from $5.52 to $3.70] orchestrated but short term profit takers, FUD mongers and fellow long traders? Then in reality, the MM has covered his short position [from the time stock ran-up] and now he has already build-up his inventory for the next round of buying… natural buying pressure from long investors or by acts of GOD [greed, optimism and deception].

Just look at the last 8-trading days [from 10/28 thru 11/6] when the stock traded flat on gradually lower and lower volume. The market maker had plenty of time to buy back stock, sell some calls and build-up his inventory.

Here's the stock chart...

Very good “Sherlock”!

But there is another piece of the puzzle that needs to be brought into place… and that is the Implied Volatility.

So, the fist thing the MM does is to assign [or whatever it takes] to increase Implied Volatility of the stock… like go from 72% to 103% or more.

The next thing MM wants to do is to force the act of GOD, as soon as signs of optimism start to show-up again. With recent news about red laser shipments by Opnext, and sale of Pico projectors by Vodaphone ─ assumed to be the mobile phone carrier customer of Microvision, there is increasing optimism in the air. The next step would be for some greed and a little act of deception introduced into the mix for the next round of buying to commence. And of course, our ever so accommodating market maker is ready and willing… with basket full of freshly acquired MVIS stock in inventory.

After hours jump in MVIS stock price to $4.11 on Friday [November 6th], it is up by 30 cents on 1,000 shares. To me, it indicates that the market maker wants to take it higher… and the trading action over the last few days is very suspect in favor of this theory.

With low volume and low volatility of the last few days, it allowed the market maker to sell calls for 40 to 50 cents premium [on May 2.5 calls for example] and buy stock cheaply to hedge it. With the stock trading flat at $3.70 on very low volume, indicating few sellers and a few buyers, the market maker wants to stir-up the things a bit more to introduce volatility to continue selling more premium and hedge more by buying stock.

Does that mean the MM is now ready with freshly acquired inventory for the next round of stock price run-up?

I think so… because I have seen it done before in the past.

As they say: “history does repeat itself.”

Are you ready to deal with the next round of stock price run-up?

I hope so!!!

[Note: Selling puts is like taking huge potential down-side risk, and tie-up portfolio margin [below $5 MVIS is not margin able] for pittance of a return. Most intelligent investors would rather buy a $3.70 stock outright or at the most buy deep in the money calls to leverage their position.]

Anant Goel