Well @Overnight asked me to explain what do I mean by "Infinite Gamma" so I explained. LOL You want to blame somebody, blame him. LOL
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Calendar Spread Basic Setup Question
- Thread starter LaxFan
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Well @Overnight asked me to explain what do I mean by "Infinite Gamma" so I explained. LOL You want to blame somebody, blame him. LOL
No, he is conflating gamma and vega. Consider that a put short from 0.25 that was marked to 50.00 can be marked to a similar gamma figure. He’s looking for justification of something flat-head stupid. Stop trying to understand or decipher stupid.
index drops 20% in a day. The ATM put on SPX on the Friday before the ‘87 crash had a higher gamma figure than it did at the close of trading on October 18, 1987. Fucking infinite gamma.
i think it’s a requirement to run a vol desk.
In case if you haven't realized, my theory or observation is trying to explain the infinite rise in option price when IV explodes. I have suspected vega also to be a culprit or at least one of the culprits responsible for the possible infinite rise in option prices but I dismissed it because I felt there is only so much sensitivity that the option price can have to one unit of change in IV whereas gamma, the acceleration of options which can have a potentially infinite value which can in turn can push an option's price to an infinite value and that is why I thought gamma is the only greek possible. That's why on that Black Monday, Oct. 19, 1987, the only thing that stopped the infinite rise in option prices was the closing of the market and in recent times when IV exploded, the only thing that stopped the option prices is the circuit breakers, essentially putting a time limit there to control by when options can be traded and essentially putting a stop to the acceleration, the gamma. I mean if it's vega that's responsible, circuit breakers or market closing wouldn't have stopped the price increase. I mean how do you make option prices "less sensitive"?
Again, as I said many times. It's a theory. I agree that gamma does reach zero when delta is either 1.00 or 0 but that's all theory according to the BSM in a static setting. In a dynamic setting, when prices are moving irl, no models explain adequately the behaviour of option price thus giving rise to this phenomenon of infinite gamma that I observed that can potentially increase the price infinitely.
Granted MM's are not out there to "screw" retail traders on purpose but to cover their risk but you can't deny the end result is the option prices rising infinitely due to this infinite gamma (I still think gamma is the most likely culprit and not vega) phenomenon until circuit breakers step in or market actually closes and this is the phenomenon that I wanted to explore. Granted that it might be driven by MM's needing to hedge before providing liquidity in a very volatile market and not really to screw retail traders and refusing to fill orders in order to make more money but still the phenomenon of infinite gamma does exist. Gamma does not go into zero when delta is 1 otherwise you won't be able to explain all the extrinsic value. Where did it come from if the option price is moving 1:1 basis with the underlying??
That's first.
Second, if MM's were just trying to cover their risk while trying to make the market to provide liquidity to absorb all the orders but how is it that the option prices' infinite increase all stopped when circuit breakers step in and/or the market closes? I mean if you are talking about risk, the risk for MM's still exist regardless whether a circuit breaker gets triggered/the market closes or not. If the market is tanking, tomorrow when you wake up, it would still be tanking, the sell/buy orders would still come flooding in and you would still be expected to provide liquidity while at the same time needing to hedge to cover your risk thus driving the underlying even further down/up and options price even higher and yet right the next day or when the circuit breaker is taken off, everything stops, the options price stop rising. If you take a look at right the next day after a huge down day like the Black Monday of 1987 or March 9, 2020 with the Covid crap, the market in both cases came back up and ended being an up day. And if you look at all of the very next days that follow a major market down day, they are all up days.
So my question is what happened to all of the flood of orders from "the retail shmucks,lax clearing agents and vol sellers who were being forced to liquidate"? What happens to their liquidating orders? What happens to all the unfilled orders when circuit breakers get triggered and/or the market closes? Do the MM's just stop taking their liquidating orders and the orders just all disappear and the "the retail shmucks,lax clearing agents and vol sellers who were being forced to liquidate" just end up with the losses? Are the MM's allowed to do that? I thought the MM's are legally bound to make market to uphold the integrity of the market, no? So what if they still want to liquidate the next day or after the circuit breaker is off? That would still drive the market down and the put option prices up but how come it didn't? What is it that MM's did that made it stop? Could the MM's have done that BEFORE the circuit breakers get triggered or the market closes or do they absolutely need that "break"?
You need to know what you dont know,and that's why the smart guys are on you like white on rice.
Cmon Dawn
EXACTLY!!! I need to know what I don't know. This is why I put my theory forward to entice discussions. I told you. You don't agree with me? You tell me your side of the story, things that we don't know but would be great to know. If those guys are really "smart" they would've written what you just wrote but they are not so they resort to ridiculing me instead. What did their comments achieve besides revealing the fact they are nothing but trolls? LOL I appreciate your response from which I learned a lot as usual but please, don't defend people who don't really deserve your defense.
Thanks again for sharing your experience.
the only plausible explanation is Vol exploding to to one sided demand due to forced liquidations..
you are way overcomplicating this,and your theory of infinite gamma makes ZERO sense..Have you played with an option calculator and tested your theory?? What input did you use for "infinite" Gamma??You cant,and you wind up sounding like Kyrie Irving.
Read up on how the circuit breakers work.
You dont understand the mechanics of trading,nor how market makers or rational human beings survive in a meltdown.
All conversations end with your infinite gamma theory..
you are way overcomplicating this,and your theory of infinite gamma makes ZERO sense..Have you played with an option calculator and tested your theory?? What input did you use for "infinite" Gamma??You cant,and you wind up sounding like Kyrie Irving.
Read up on how the circuit breakers work.
You dont understand the mechanics of trading,nor how market makers or rational human beings survive in a meltdown.
All conversations end with your infinite gamma theory..
dude, when the market does nothing and realised is low, short term vol is always lower than long term vol. Go ahead and "collect" a couple of pennies in theta, run huge gamma risk and watch backmonth vega drain your account
Then what do they mean by "steep premium" in this article?
Exchange officials dispute that. With the stock market in free-fall, the risk of buying was too great and traders had to demand steep premiums to protect themselves from disaster. "It's like walking into a burning house and trying to buy fire insurance. Of course it costs a lot," said a CBOE spokesman."
https://www.washingtonpost.com/arch...ped-out/090c57f7-fc75-4f02-9d22-585cf53c8548/
With the market tanking like that, the put option that the guy in the article shorted must've been WAY DITM so the delta should've been absolutely 1 and if the gamma is 0 when the delta is 1, WHERE did these premiums and steep premiums come from??!! Everything should be intrinsic value; there should've been no premiums. If you look at an DITM option right now with delta of 1, gamma of 0 from any option table, its price is exactly the intrinsic value but that's not how it happened that day obviously. If it could happen back then, it could happen today and it does happen today, just on a muted level because of circuit breakers.
Unless you have the option chain of SPX from that day to show me on that day, even in such extreme market condition that for all DITM put options, the gamma were all zero and the option prices were all equal to intrinsic value then I am willing to at least accept the fact that gamma does behave according to option pricing models.
I did but they don't really go into details to explain the specific mechanism or process of how it works in mitigating a volatile market aka a meltdown except just to say "it gives market makers a break for them to cover their risk".
I don't. I admit. That's why I was asking if you can share some insight as how MM's worked during extremely volatile markets to cover for risk. That's why I asked previously specifically:
- What happened to all of the flood of orders from "the retail shmucks,lax clearing agents and vol sellers who were being forced to liquidate"?
- What happens to their liquidating orders? What happens to all the unfilled orders when circuit breakers get triggered and/or the market closes? Do the MM's just stop taking their liquidating orders and the orders just all disappear and the "the retail shmucks,lax clearing agents and vol sellers who were being forced to liquidate" just end up with the losses?
-Are the MM's allowed to do that? I thought the MM's are legally bound to make market to uphold the integrity of the market, no? So what if they still want to liquidate the next day or after the circuit breaker is off? That would still drive the market down and the put option prices up but how come it didn't?
-What is it that MM's did that made the price stop rising? Could the MM's have done that BEFORE the circuit breakers get triggered or the market closes or do they absolutely need that "break"?
If you are able to share your insight by answering these questions above then I would appreciate it. It's ok if you don't but how do you explain then how would the price continue to spiral down until it's stopped by circuit breakers or market closing? I mean if you say MM's look to the futures market for hedging then what does the futures market look to? What determines the prices in the futures market?
You guys were the ones who decided to ask me to explain "infinite gamma" so I explained. LOL
Doesn't matter. We run the risk either way. If we don't want to run gamma risk and actually "long vol", we get crushed by volatility collapsing when nothing happens in the front month so we might as well collect some pennies, better than nothing. The only thing is we just need to do is to be sure to hedge.
I know you are a smart guy,but you are asking questions that you know,or should know the answer to,as I have answered every one of them..
Look at a simple option calculator and look at the user inputs. Which input makes options more expensive?? FWIW,Gamma is not an input,its an output.I dont understand your unhealthy,irrational obsession with Gamma and Option pricing 101.
Two identical stocks with the same historical vol and price. Both have options on them,and you make markets on both stocks.
Stock A trades 1,000,000 shares per day with a penny wide bid offer spread,20,000 up
Stock B trades 5,000 shares per day with a 50 cent wide bid offer,300 up...
Buyer walks into both crowds, wants an offer on 5000 ATM calls...
Tell me how this story ends...
Look at a simple option calculator and look at the user inputs. Which input makes options more expensive?? FWIW,Gamma is not an input,its an output.I dont understand your unhealthy,irrational obsession with Gamma and Option pricing 101.
Two identical stocks with the same historical vol and price. Both have options on them,and you make markets on both stocks.
Stock A trades 1,000,000 shares per day with a penny wide bid offer spread,20,000 up
Stock B trades 5,000 shares per day with a 50 cent wide bid offer,300 up...
Buyer walks into both crowds, wants an offer on 5000 ATM calls...
Tell me how this story ends...
