It's just before 9 a.m. Tuesday, and the
American Stock Exchange
options floor is quiet. There is no din of excitement, little haste, and few live bodies except for some traders taking in the morning's news in preparation for the open.
In one far corner of the Curb's floor, options specialist Frank Maiolo is checking prices before trading starts in
options. He looks over a chain of strike prices ranging from 37 1/2 to 350, a trading range that holds dangers at both ends.
"Now I know how the turkey feels the day before Thanksgiving," Maiolo said on the morning after Amazon popped 15 points. "Hours feel like days; days feel like months. I traded
in 1989 after the San Francisco earthquake closed the
floor, and that's the only thing that comes slightly close to this. We're in uncharted waters."
The extremes of Amazon's moves hold the greatest threat to floor traders. In single trading sessions, the stock gobbles up new ground like the Minnesota Vikings' offense and crashes through strike prices thought unreachable the day before. The market makers must take the other side of the trade, opposing the legions who are buying the online bookseller in an effort to catch a little more of its meteoric rise, and then try to hedge by buying stock or other options.
In the old days, say 1996, floor guys would worry when a broker representing a major Wall Street power came into the crowd with an order. These days, however, retail orders come in like a swarm of mosquitoes to nip away at a trader's P&L. And, distinctly in the Internet sector, Ma and Pa Kettle have replaced
as the sharks.
"It's clearly not
banging up these stocks," says Jon Najarian, the head of options firm
, which trades many Internet and tech stocks on other U.S. options floors. "You get 20,000 prints of 300 shares each. The problem is that there's not the liquidity in the name."
That lack of liquidity causes one big problem for floor traders. On Amazon's big days, the stock moves so quickly that traders can't hedge their call sales by buying stock at the same price. Retail investors play momentum -- they pretty much have no choice -- so floor traders get piled on as stock becomes scarce and they're forced to pay more to get it.
For instance, an investor's buy order comes down for an Amazon.com January 300 call. The market maker on the other side of the trade would typically sell the calls and then buy the stock, which is trading for, let's say, 295. With the velocity of its recent movements, Amazon stock might be at 302 by the time the market maker can get enough stock to hedge the sale.
"Most traders are happy if they can get stock about 1/4 or 1/8 off the price. When we get within $10, we're pretty psyched," says Kristen Daly, a
trader and the crowd's lone female. The youthful Daly came to Amazon during the summer, she says, bored with a sedate pit that gave her far too much time for crossword puzzles.
Keith Keenan, an options trader at discount firm
Wall St. Access
, feels her pain even though he's on the other side of the order flow. His firm's clients are just the kind of independent-minded, chase-the-mo-mo investors who have made hay trading Amazon options, mostly buying calls as a cheap proxy for the stock. "It's so hard for these guys on the floor to get hedged. If I go down to buy 200 Amazon calls, they're going to run for cover," Keenan says. "If you go larger than a 100-lot, you almost have no idea where you are going to get a print."
The Amazon booth at the Amex is small one -- maybe six or seven traders -- but it is by no means the province of small fry, mostly because it takes deep pockets to sustain the kind of damage that being short these options brings. "In the 10 years I've been here, it's the most difficult trading I've seen," says Stephen McQuade, a market maker in Amazon. "Our partnership is the smallest firm in here, and we have about $1.4 million in capital. There are a lot of independent traders capitalized at $250,000 who can't come in here and afford to blow $100,000 in one day." Maiolo chimes in that some traders have lasted just one day trading Amazon before opting for a less volatile way to make a living. The NYPD Bomb Squad might be one option.
Typically, Daly offers, when a stock is rallying, there are investors willing to sell some premium (that is, sell calls on the chance that the stock might actually sit still for a while). That sentiment has yet to dawn on the Amazon devotees, who as of midday Tuesday had to pay 21 ($2,100) for a call that was struck about 30 points out of the money.
The same trend is noticed upstairs. "I heard one
trader say, 'You don't trade these stocks, they trade you,'" says one trader with a Chicago-based brokerage. "The difference with the retail clients is that they will keep paying up. Once it
the stock gets going, they keep buying calls. Institutions won't do that."
Yet Amazon's 30-point days have yet to really rattle this bunch. "We're making fairly orderly markets. All of these traders have been around," McQuade says. "When it's been up 35 in one day, no one looks like they're close to suicide, although I've been a little white." Maiolo says he tries to never go into a fast market (the condition in which publicly disseminated quotes can't be relied upon). "The public likes to get the prices they see on the screen. We try to do that with all the Internet stocks," he says.
Maiolo, McQuade and the others are taking their lumps for a greater good. They are trying to develop a franchise in the listing, to win all the valuable major firm "switches" that route order flow to certain exchanges.
Of the four exchanges that trade Amazon options, more volume comes through the Amex floor than any other, with the
Chicago Board Options Exchange
crowd running second. "Trading this stock costs us
the traders money and will continue to cost us money, but it holds the potential to be a strong trader in the future. We're here for the long run," says Maiolo, who works for
, one of the more important Amex specialist firms.
The liquidity problem may be eased with the 3-for-1 split expected next week, but the Amex traders aren't sure of when the action will get easier. "Maybe when it hits 400," says one, to the nervous laughter of the others before Maiolo warns. "That could be by the end of the day."