I noticed for hot stocks occasionally you can see buy to open front month call or put position in huge amount, like thousands contracts at once. It seems to me it's a pure bet and those players are really speculating the market direction. Is my understanding right? and if so who are those players, rich individuals wanna throw away money to locals?! Or some insiders got info...
What kind of players are they?
- Thread starter LucasX
- Start date
1) "That" can happen with hot stocks, especially if they are going up day-after-day-after-day and continue to garner media attention.
2) That's mostly right.
3) They're speculative buyers. Some of the time, those people can make a lot of money in the middle of a big trend.
4) Insiders tend to "reach" for farther-out-of-the-money strike prices to maximize their rate of return because they know what the buyout price will be.
Thanks for your comment, Mark. I don't know for sure. It's just my guess with my little understanding on option trading. That's why I ask opinions from you guys.
My arguments are first of all it's front month. Then it's with huge volume in one or two trades. You will give away huge amount of edge to get in. If it's a leg or part of a strategy, what do you think to hedge that position.
Quote from nazzdack:
1) "That" can happen with hot stocks, especially if they are going up day-after-day-after-day and continue to garner media attention.
2) That's mostly right.
3) They're speculative buyers. Some of the time, those people can make a lot of money in the middle of a big trend.
4) Insiders tend to "reach" for farther-out-of-the-money strike prices to maximize their rate of return because they know what the buyout price will be.
Thanks Nazzdack. I learned a lot from you, especially bullet 4.
LoL
If I buy 10,000 calls and you can determine that I paid the 'ask' price, then you know that I am buying, and not selling.
What can you conclude from that?
Can you conclude I am bullish? The real answer is 'no.' Here's why:
a) I may be covering a front-month option that I sold a long time ago. If that's the case, you may be able to figure that out when open interest is published tomorrow. But, if its an actively traded option, you are not likely to get that information.
b) Intending to disguise my intentions, I may be selling 1,000,000 shares short, converting my long call position into a synthetic put position. In this case I would be wildly bearish, but you have no way to know if I am selling stock.
c) I may be taking a delta neutral position by selling just enough stock to be delta neutral. In this scenario, I would have no market bias.
d) And, of course, I may simply be taking a long position. Possibly speculative, possibly as a hedge against some portion of my portfolio etc.
The point is - you never know what the option buy or seller is doing.
Mark
Mark, I agree with some of your points but not all. Here are my understanding of every sentence you commented. Correct me if I am wrong.
"If I buy 10,000 calls and you can determine that I paid the 'ask' price, then you know that I am buying, and not selling."
Yes, I can determine that. We can get tick data with time stamp and sale price directly from exchange or other sources. This is not a problem.
"Can you conclude I am bullish? The real answer is 'no.' Here's why:"
My answer is yes and no. Sometimes I guess I can, sometimes like you said it's hard to say. Depends on how much information you had at that time.
"a) I may be covering a front-month option that I sold a long time ago. If that's the case, you may be able to figure that out when open interest is published tomorrow. But, if its an actively traded option, you are not likely to get that information."
I disagree with you this point. Suppose you sold front-month option long time ago and held it(not covering) until today's bulk trade, then I don't need tomorrow open interest info to figure out you are covering. Why? cause as long as you hold your short option pos, those pos will reflect in the open interest each day after you sold. I can always look back historical open interest and compare those with bulk volume. Tomorrow doesn't matter in this case.
"b) Intending to disguise my intentions, I may be selling 1,000,000 shares short, converting my long call position into a synthetic put position. In this case I would be wildly bearish, but you have no way to know if I am selling stock."
Sure, you can selling tons of shares to convert to put. It's a way to make money I agree but it's way risky. My understanding of this play is you first bot huge amount call then sell even bigger amount shares. Run over everyone. What if shits happen you can't sell short anymore or if shares are hard to borrowing, like VW short got crucified.
There is no way to knowing if selling stock? I disagree. Depends on how much you are selling. If 10,000 lots in your example, man, that's a lot. I can easily find out those info from chart's volume or time and sale stamp. Even you initiated a VWAP order, I guess just my guess. It can't be finished in one day for certain low volume stocks.
"c) I may be taking a delta neutral position by selling just enough stock to be delta neutral. In this scenario, I would have no market bias."
What's the point here? Are you implying they want to do gamma scalping to compensate front month theta loss everyday? Is this a good way to do gamma scalp? I don't know. It's open to debate.
"d) And, of course, I may simply be taking a long position. Possibly speculative, possibly as a hedge against some portion of my portfolio etc."
It all boiled down to the correlation between a single stock and your portfolio if you intend to use it to hedge your whole portfolio. how do you know that correlation will hold constant? Not mention beta effect. there is a big question mark in my mind that this is a proper way to use a single stock option to hedge your whole portfolio. I might be wrong for this point. has anyone ever heard of this type of hedging, let me know.
that's all I had to say. Thanks Mark. You brought up a lot of interesting points worth of thinking.
an option newbie
Lucas
"If I buy 10,000 calls and you can determine that I paid the 'ask' price, then you know that I am buying, and not selling."
Yes, I can determine that. We can get tick data with time stamp and sale price directly from exchange or other sources. This is not a problem.
"Can you conclude I am bullish? The real answer is 'no.' Here's why:"
My answer is yes and no. Sometimes I guess I can, sometimes like you said it's hard to say. Depends on how much information you had at that time.
"a) I may be covering a front-month option that I sold a long time ago. If that's the case, you may be able to figure that out when open interest is published tomorrow. But, if its an actively traded option, you are not likely to get that information."
I disagree with you this point. Suppose you sold front-month option long time ago and held it(not covering) until today's bulk trade, then I don't need tomorrow open interest info to figure out you are covering. Why? cause as long as you hold your short option pos, those pos will reflect in the open interest each day after you sold. I can always look back historical open interest and compare those with bulk volume. Tomorrow doesn't matter in this case.
"b) Intending to disguise my intentions, I may be selling 1,000,000 shares short, converting my long call position into a synthetic put position. In this case I would be wildly bearish, but you have no way to know if I am selling stock."
Sure, you can selling tons of shares to convert to put. It's a way to make money I agree but it's way risky. My understanding of this play is you first bot huge amount call then sell even bigger amount shares. Run over everyone. What if shits happen you can't sell short anymore or if shares are hard to borrowing, like VW short got crucified.
There is no way to knowing if selling stock? I disagree. Depends on how much you are selling. If 10,000 lots in your example, man, that's a lot. I can easily find out those info from chart's volume or time and sale stamp. Even you initiated a VWAP order, I guess just my guess. It can't be finished in one day for certain low volume stocks.
"c) I may be taking a delta neutral position by selling just enough stock to be delta neutral. In this scenario, I would have no market bias."
What's the point here? Are you implying they want to do gamma scalping to compensate front month theta loss everyday? Is this a good way to do gamma scalp? I don't know. It's open to debate.
"d) And, of course, I may simply be taking a long position. Possibly speculative, possibly as a hedge against some portion of my portfolio etc."
It all boiled down to the correlation between a single stock and your portfolio if you intend to use it to hedge your whole portfolio. how do you know that correlation will hold constant? Not mention beta effect. there is a big question mark in my mind that this is a proper way to use a single stock option to hedge your whole portfolio. I might be wrong for this point. has anyone ever heard of this type of hedging, let me know.
that's all I had to say. Thanks Mark. You brought up a lot of interesting points worth of thinking.
an option newbie
Lucas
Ok Lucas. Part of being a newbie is asking questions. Unfortunately not all the answers you get are good. That's your job - to figure out which are correct.
the thing about being a rookie is that there's lots of stuff you have not yet learned - or have been misinformed about. So it behooves you to try to get the information, rather than disagreeing. Not saying you have to take my reply as gospel, but you could do some of the research you would be doing when tracking my hypothetical 10,000 call trade..
Mark
http://blog.mdwoptions.com/
My original purpose of this question is to get an idea of what kind of players they are not guessing their intention from their positions. Never mind, I would like to know every error I made so I won't make it when I am trading.
"I don't get this. You don't have any idea if I am keeping the calls naked long or if I am hedging with enough stock to turn the position bearish. How can you guess what someone does with an option position?"
I agree. You are actually saying with option, you can create real short/long or synthetic short/long pos in underlying or option.
"First, you will not see today's chane in OI until tomorrow. It's not published today. It's published once per day, overnight. Next, if 100,000 contracts trade the same day that I buy my 10,000 contracts, my trade get buried and OI tells you nothing about the 10,000-lot trade."
I understand what you are saying. If they are covering, there are only two possible pos before covering: real short call or synthetic short call. In the first case, real short call pos will be reflected in the historical OI. And all historical OI is less than bulk trade volume. In the latter case, sell put sell stk can create same naked short call pos. But will put pos reflect in OI as well? It's more easier to hide intention in stock trading due to huge turnover.
"It is no more risky than buying 10,000 puts. It is equivalent to buying those 10,000 puts. And no, someone in this position does not sell 'way more' stock. You sell 100 shares for each option bought. To hedge 10,000 call, the trader sells no more than 1,000,000 shares."
My bad, it's a misunderstanding. I thought you want to sell more stocks than just convert to a synthetic put pos. Yeah, even if u just lose put premium, it in 10,000 scale. You boss won't be happy to see you again next week I guess.
"Besides why would you want to make all this effort. Why would you care what I did with my 10,000 calls. Are you going to assume that I know something just because I bought 10,000 shares? Do you plan to 'follow me' and do the same thing? That would be very foolish."
Why? I want to know if those bulk traders are more sophisticated than locals. So I can pick side. It is all about info increase your odds.
"It is NOT open to debate. as you said, you don't know. For a trader who anticipates big volatility in this stock, gamma scalping is a viable, profitable methodology."
I agree.
" Nut, the call buyere may also be wagering on a substantial move - in one direction or another and is doing this play instead of buying straddles. It's equivalent to buying straddles."
So it's still a bet on one direction. I see your point.
"Now you are off on a tangent. You said you can determine what I was doing with the options. No one cares if you agree or disagree with the reasoning of the buyer of 10,000 calls. It is irrelevant whether the trader is doing something smart or stupid.
And your argument is exactly why you should NOT care if I, or anyone else buys the calls. I may not know what I am doing and why in the world would you want to follow such a trader? How can it be worth your time to do the research in a feeble attempt to know if I kept, or hedged the calls?"
Like I said before, why I should care is because if they are dumbs. I want to stand with locals and educate them. To be honest, locals are also doing bulk trades recently. I don't know equity option side, but in future market hell yeah they do trade bulk size.
"the thing about being a rookie is that there's lots of stuff you have not yet learned - or have been misinformed about. So it behooves you to try to get the information, rather than disagreeing."
I disagree with respect. If everyone agree with each other, I can't imagine how world made progress so far. That's how we learn as human being.
Mark, it's my pleasure to discuss and argue with you. I learned a lot from you guys.
Rookie Lucas
"I don't get this. You don't have any idea if I am keeping the calls naked long or if I am hedging with enough stock to turn the position bearish. How can you guess what someone does with an option position?"
I agree. You are actually saying with option, you can create real short/long or synthetic short/long pos in underlying or option.
"First, you will not see today's chane in OI until tomorrow. It's not published today. It's published once per day, overnight. Next, if 100,000 contracts trade the same day that I buy my 10,000 contracts, my trade get buried and OI tells you nothing about the 10,000-lot trade."
I understand what you are saying. If they are covering, there are only two possible pos before covering: real short call or synthetic short call. In the first case, real short call pos will be reflected in the historical OI. And all historical OI is less than bulk trade volume. In the latter case, sell put sell stk can create same naked short call pos. But will put pos reflect in OI as well? It's more easier to hide intention in stock trading due to huge turnover.
"It is no more risky than buying 10,000 puts. It is equivalent to buying those 10,000 puts. And no, someone in this position does not sell 'way more' stock. You sell 100 shares for each option bought. To hedge 10,000 call, the trader sells no more than 1,000,000 shares."
My bad, it's a misunderstanding. I thought you want to sell more stocks than just convert to a synthetic put pos. Yeah, even if u just lose put premium, it in 10,000 scale. You boss won't be happy to see you again next week I guess.
"Besides why would you want to make all this effort. Why would you care what I did with my 10,000 calls. Are you going to assume that I know something just because I bought 10,000 shares? Do you plan to 'follow me' and do the same thing? That would be very foolish."
Why? I want to know if those bulk traders are more sophisticated than locals. So I can pick side. It is all about info increase your odds.
"It is NOT open to debate. as you said, you don't know. For a trader who anticipates big volatility in this stock, gamma scalping is a viable, profitable methodology."
I agree.
" Nut, the call buyere may also be wagering on a substantial move - in one direction or another and is doing this play instead of buying straddles. It's equivalent to buying straddles."
So it's still a bet on one direction. I see your point.
"Now you are off on a tangent. You said you can determine what I was doing with the options. No one cares if you agree or disagree with the reasoning of the buyer of 10,000 calls. It is irrelevant whether the trader is doing something smart or stupid.
And your argument is exactly why you should NOT care if I, or anyone else buys the calls. I may not know what I am doing and why in the world would you want to follow such a trader? How can it be worth your time to do the research in a feeble attempt to know if I kept, or hedged the calls?"
Like I said before, why I should care is because if they are dumbs. I want to stand with locals and educate them. To be honest, locals are also doing bulk trades recently. I don't know equity option side, but in future market hell yeah they do trade bulk size.
"the thing about being a rookie is that there's lots of stuff you have not yet learned - or have been misinformed about. So it behooves you to try to get the information, rather than disagreeing."
I disagree with respect. If everyone agree with each other, I can't imagine how world made progress so far. That's how we learn as human being.
Mark, it's my pleasure to discuss and argue with you. I learned a lot from you guys.
Rookie Lucas
Options can be crossed at any price with the high and low of the day. SO you may see 10k trade at what appears to be the ask at the time but those may have traded earlier and be linked to stock or other options and have nothing at all to do with what the market in those options at the time they hit the tape was.
The bottom line is you just have no real way kf knowing who initiated the options trade, what side they are on or why.
The bottom line is you just have no real way kf knowing who initiated the options trade, what side they are on or why.