Let me cite an example of too many. Say you buy call options on XYZ stock whose open interest is currently, at 250. You decide to buy 200 of it at say $2.00. Now, assuming it is a thinly, traded stock option, you have most of the contracts available. Now, the stock for some reason drops like a rock and now you have huge losses and wish to exit. Problem is nobody wants to buy your call option back at the $2.00 or higher price. Now, it is being bid at $0.20 by the market marker and he only wants 100 of it. You are now stuck and cannot get out of your position. Now, you can sell the 100 contracts at $0.20 each but, you still have 100 contracts that you will not be able to sell.
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Is there such thing as buying too many contracts?
- Thread starter Sameresult
- Start date
Let me cite an example of too many. Say you buy call options on XYZ stock whose open interest is currently, at 250. You decide to buy 200 of it at say $2.00. Now, assuming it is a thinly, traded stock option, you have most of the contracts available. Now, the stock for some reason drops like a rock and now you have huge losses and wish to exit. Problem is nobody wants to buy your call option back at the $2.00 or higher price. Now, it is being bid at $0.20 by the market marker and he only wants 100 of it. You are now stuck and cannot get out of your position. Now, you can sell the 100 contracts at $0.20 each but, you still have 100 contracts that you will not be able to sell.
Voiding all the pyschological factors, what would be the implications if you bought too many contracts? Is there such a thing as too many?
Would mass pain fade you in this case?
Will the market pin the price and burn the (tetha) contracts?
it depends.
if you are long options you can create a gamma squeeze (good for you: see GME) or you can cause your own pin (bad). If you are short you can force a pin (good for you) or you can cause your own gamma squeeze (bad). It all depends on the counterparties behavior.
No matter what there’s no cheap exit. So if you are wrong or if the street figures you out, you are toast (see LTCM varswap trade)
I think that the term "contract" refers to options contracts.Options or stock?
I think that the term "contract" refers to options contracts.
I had to ask for the distinction because the commentor introduced the concept of darkpools.