Calls and strikes.

You have to understand this stuff. I don't want to cause a squeeze in anything so let's say we are trading

National Gift Wrap

, not


(BA) - Get Report








It is at 39. Let's say there are 2000 March 40 calls sold short. They may have been sold for 4 bucks when the stock was at 40 a month ago. It might have subsequently dropped to 30. The guy who was short them, or the guys who were short them, never bought them back. They are what we call in the business "idiots."

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You have to close out a short of calls to profit or else the short remains. As the stock came back, perhaps because a strike was settled at National Gift in the last day, the stock vaulted much higher than expected. Suddenly it is at 40 again and buyers are coming out of the woodwork to own more common stock.

Can you afford to be short National Gift with this kind of demand out there? That's the dilemma you face on Monday if the stock closes above 40. Suddenly your great trade -- you would have made four bucks if the calls went out worthless -- is looking like a disaster.

You feel the pain, the worry of being short National Gift. You imagine the potential upgrades, the buy imbalance, the cyclical excitement that might beckon. The analysts are savoring this change in the market, this Old Economy rotation, and they are coming out of the woodwork to praise it.

So you go to try to buy the calls back. You want to cover and close out. And someone else is out there -- me perhaps, trying to block you by paying over you. The calls are offered at a quarter and I am taking them ahead of you. Then I am buying them at a half, at three-quarters, because I know your pain. I have been there. I have had it happen to me.

I know you will capitulate. I know you.

Finally, you give up on the calls and you switch to common. You try to buy 200,000 common, a huge order of National Gift. Now there are three buyers in the common and two in the calls and the word goes out among the traders: "Goofus is short National Gift. He has to cover." That kind of rumor spreads faster than light from the Sun.

Now the world is collapsing around you. Your breath, it isn't happening, it is forced. Your forehead is flushed. You are sweating profusely and you are scared. You can't even panic. You can't even react. You can't do a thing.

"Buy 200,000 National Gift at the market!" you shout out as the hammer that's been slamming your head instantly goes away. "Just &*$&^#^#^@ buy the &*(%$&^$ thing."

And you buy it up four points. You break even on the trade -- that 's where you sold the calls ($4 plus $40 ) -- and you make a break out in the chart and the stock never looks back.

That's what's happening right now on your screen. These small unit battles at various strikes. That's the game of calls and strikes. Enjoy it if you are long. Understand, though, that this move has nothing to do with National Gift. Never did. Never will.

It has to do with fear. Fear is the real driver of stocks. Head traders like Todd Harrison can smell fear from symbols and prices. And you can never hide the smell of your own fear.

Random musings:

I intend to do a raft of rewrites this weekend. This will be part of the package.

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long Nortel, Boeing and Hewlett-Packard. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at