Yes, that is why I said the customer (buy side) moves the stock. If everyone loaded up on long call options tomorrow in GOOG, the net effect would be large stock purchases by the mm's which in turn would push the stock higher.
Gooooooogle
- Thread starter IV_Trader
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Yes, that is why I said the customer (buy side) moves the stock. If everyone loaded up on long call options tomorrow in GOOG, the net effect would be large stock purchases by the mm's which in turn would push the stock higher.
Mav, I have agreed with all your posts so far. But this one seems too 'set in stone'.
Isn't it true that mm's, since they are also selling 'premium', can also offset retail call buying with some put sales thereby gaining more premium. These put sales could then be offset by shorting stock as hedge -- thereby offsetting other mm stock purchases.
Or, in the case of a stock like GOOG, since there is such a large open interest in all the strikes, the mm can just buy/sell other put/calls as hedges - thereby not needing to engage in any stock transactions.
I have found it quite common that the bid/ask size on the options can be huge. sometimes it is 500x500 (not shares, options).
Nope. And let me explain why. First of all, there is not a mm in the world that is going to hedge short deltas in GOOG by selling puts. He wouldn't even do that with a stock like GE and certainly not GOOG. Why would a mm sell naked straddles when he can arb the shit out of GOOG all day long and go home to his family and put food on the table. No way he sells the straddle/strangle naked.
Now, let's move on to the other possibility. Let's say he sells the calls and can immediately turn around and buy them back on his bid. What happens here? Well, normally, if he bought the calls, he would have to sell the stock and therefore create selling pressure in the stock no? So by buying the calls back, the net effect is the same.
To understand how this work, a simple understanding of synthetics and put/call parity is important. Every trade a mm makes has a net effect. He is either trading the underlying as his hedge or he is offsetting the trade and mitigating the offsetting underlying trade. If you do the math, it works out the same. Get out a piece of paper and work some examples. You will see what I mean.
I know a lot of people on this board like to think mm's are cowboys or they just like to sell premium, but nothing could be further then the truth. These guys replicate their positions all day long for nickels and dimes and make a damn good living at it. No need to speculate on their part. And why should they.
When I worked at Letco, the 2nd largest mm firm on the floor in the late 90's, we had a guy a guy in the YHOO pit that took home about 750k a year. This was back in the day when YHOO traded just like GOOG. He never took a delta, never took a punt, all he did was c/r, locks, boxes, synthetics all day long. Slept like a baby at night.
And btw, selling puts and selling stock is the same thing as selling syn calls. So there is no way he would sell calls and then sell more syn calls. Not a chance in hell.
Quote from hajimow:
hajimow
if you had sold ITM (deep) puts and bought a couple deferred calls in the morning - you'd be sitting OK on GOOG. No?
My first mistake was that I did not cover after I shorted and it went down to 359 AH. But today I sold a couple of PUTs 360 for February for $3.50. I did not sell any Call. You are right about your strategy. I am still holding to my short.I did not want to have my first losing trade in 2006. I Know that I did not take the right action. It was ideal if I had covered my short at 384 BH this morning and went long but I still have my conspiracy theory which is:
I think we had 3 downgrades and two upgrades today. I belive no one (even I) did not like to see like $90 drop in GOOG because it would hurt everyone portfolio even those who don't have GOOG as it would drag the market down . Those analysts who came to support GOOG were saying they would buy GOOG at low 300 which implies they also believe GOOG is overpriced at this level and there is room for more drop. Many shorts covered today and some traders got in as they saw it a bargain. Once GOOG becomes a market performer ,it will start to drop. I believe it will happen very soon. GOOG is a great company which is overpriced. IMHO
I had said "better yet" sell deep ITM puts with some deferred OTM calls that would have protected you until you got a read on the tape. Of course that might have complicated things since your original trade (plan) was an overnight short on the underlying.
having been in the market through the bubble years - there is no such thing as overpriced. Of course we'd like to think the market has sobered up after the butt kicking it got in 2000-2002!
don't let any losses run on this one - you can always re-enter - and particularly when you were wrong. When I am wrong or confused on a certain equity -- I am usually twice as careful the next time or won't even trade it- since I recognize I am not in sync.
if you want some GOOG short action - maybe buy an atm call and sell a DEEP itm call after you think GOOG has topped out - st.
Mav, it's my bedtime here so I need to sleep on this.
I just cannot believe that mm's are that ready to go long or short stock to protect a few bucks premium on their option sales. You speak of 'arbs'.
Look at the recent post from diz. He was going to sell GOOG feb 430 calls for $5.00 or so. Do you really think a mm is going to short GOOG at 400 to offset the other side of Diz 's sale for 5 bucks! Not likely, but if so , he would use some kind of ratio and it would not likely affect the underlying.
I have had my third glass of red and am not thinking too clearly, so I will look fwd to your reply tomorrow
I just cannot believe that mm's are that ready to go long or short stock to protect a few bucks premium on their option sales. You speak of 'arbs'.
Look at the recent post from diz. He was going to sell GOOG feb 430 calls for $5.00 or so. Do you really think a mm is going to short GOOG at 400 to offset the other side of Diz 's sale for 5 bucks! Not likely, but if so , he would use some kind of ratio and it would not likely affect the underlying.
I have had my third glass of red and am not thinking too clearly, so I will look fwd to your reply tomorrow
Quote from wabrew:
Mav, it's my bedtime here so I need to sleep on this.
I just cannot believe that mm's are that ready to go long or short stock to protect a few bucks premium on their option sales. You speak of 'arbs'.
Look at the recent post from diz. He was going to sell GOOG feb 430 calls for $5.00 or so. Do you really think a mm is going to short GOOG at 400 to offset the other side of Diz 's sale for 5 bucks! Not likely, but if so , he would use some kind of ratio and it would not likely affect the underlying.
I have had my third glass of red and am not thinking too clearly, so I will look fwd to your reply tomorrow
Of course he will. He is hedging the deltas. If he sold Feb 430 calls for 5 pts and those calls had a delta of 30 and he sold 10 of them, he would buy 300 shares of stock. Now what does he do? He is now bidding for the Feb 430 puts. Once he gets them, he can buy another 700 shares and he has completed the conversion and locked the position. Long stock/short calls/long puts......conversion at the 430 strike. This is how you make a market. Not trying to be condescending, but rather trying to explain it for the benefit of those on the thread.
Edit: He is not trying to protect a few bucks, he is trying to lock in the arb with no risk.