Can a HF manager do this?

Pekelo

Pekelo

I wouldn't call it stock manipulation, just trading a stock with a large capital. So let's say the HF has 5 billion AUM and the manager allocates 100 mm to this strategy. (the point is that it is a small amount of their capital, but big enough to move the stock)

He picks a stock that has a medium trading volume with good option strikes. A too high volume and his trading might not move the stock much, a too low volume and volatility will be too much. So he buys a bunch of calls and starts to buy the stock. When 100 mm is coming in as buying power in a medium volume stock, the stock will move up. Once he runs out of the 100 mm or the stock moved up a decent % he sells the calls, and turn around. He buys a bunch of puts, covering his stocks and starts to sell the stocks.

Rinse and repeat. As long as he is not going to own more than 5% of the stock and his buying and selling moves the stock so the options get a decent gain, what holds him back to do this all day long?
 
Pekelo said:
I wouldn't call it stock manipulation, just trading a stock with a large capital. So let's say the HF has 5 billion AUM and the manager allocates 100 mm to this strategy. (the point is that it is a small amount of their capital, but big enough to move the stock)

He picks a stock that has a medium trading volume with good option strikes. A too high volume and his trading might not move the stock much, a too low volume and volatility will be too much. So he buys a bunch of calls and starts to buy the stock. When 100 mm is coming in as buying power in a medium volume stock, the stock will move up. Once he runs out of the 100 mm or the stock moved up a decent % he sells the calls, and turn around. He buys a bunch of puts, covering his stocks and starts to sell the stocks.

Rinse and repeat. As long as he is not going to own more than 5% of the stock and his buying and selling moves the stock so the options get a decent gain, what holds him back to do this all day long?
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Slippage. He's taking on a lot of inventory to push the price up.

The guy does this in reminiscents of stock operator.
 
newwurldmn said:
Slippage. He's taking on a lot of inventory to push the price up.
The guy does this in reminiscents of stock operator.
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The inventory is only for a few hours. And how is this different from actually buying the stock for holding it for months, isn't that the same inventory, just with much longer time frame?

Your last sentence indicates that this worked in the past. Why wouldn't it work now?
 
Pekelo said:
The inventory is only for a few hours. And how is this different from actually buying the stock for holding it for months, isn't that the same inventory, just with much longer time frame?

Your last sentence indicates that this worked in the past. Why wouldn't it work now?
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Over a longer timeframe the slippage becomes irrelevant.

Like all strategies, it will probably work in certain situations and I'm sure people do it today.
 
the option market makers hedge their exposure ... they won't do it for free ... nope this isn't a strategy that would work ...
 
Buying calls will push the price up, so the stock purchases will be at elevated levels. Selling calls will depress the stock price and cause a loss on the stock position, no? Likewise, proceeding to buy puts will cause more losses on stock position.

The success would depend on behaviour of other players. If you create a trend and others are willing to join the trend and take your position at current prices, then it works. If the other participants bet on mean reversion, then you're gutted because they won't purchase your calls and stock at those elevated levels and you have to sell at a loss.
 
This guy describes a similar scenario just without options:

http://www.easysafemoney.com/how-a-hedge-fund-manager-can-manipulate-the-markets/

Furthermore:

https://seekingalpha.com/instablog/...w-the-big-players-manipulate-the-stock-market

"In the video, Cramer described activities used by hedge fund managers to manipulate stock prices - some of debatable legality and others illegal. He described how he could push stocks higher or lower with as little as $5 million in capital when he was running his hedge fund. "
 
Eurokopek said:
Buying calls will push the price up,
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What if he buys the calls and puts at the same time? Let's say stock is at $40, he start buying 41 calls and 39 puts. It shouldn't effect the price because the pressure is both ways, right? Then he uses 50 mm to buy stocks. Once done, cashes out of calls and start to sell everything and more (meaning shorting), so the 50 mm buying power move suddenly turns into 150 mm selling power. That means the price should dip way below the initial $40, making the puts higher than their original price.

On the full short position he can sell more puts, making it a covered put play...etc.
 
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