the volume on the atm weekly options are always really high, quite frequently higher than the open interest. what's going on here?
who's trading these weekly options?
- Thread starter spectastic
- Start date
Can you explain more?
When r/wallstreetbets retards retail traders load up on short-term calls, the MMs who are selling all this volume have to hedge it by buying a bunch of shares. But doing that drives up the price of the underlying - which makes their inventory of short calls even more -delta, so they have to hedge by buying more shares. If you've seen Indiana Jones standing on a cliff that begins to crumble, then quickly turns into a full-on avalanche, you've seen this scenario before.
But note what happens to the gamma of the calls that used to be [F]OTM: as the price of the underlying moves toward those strikes, gamma (ddelta) becomes progressively larger - so for each subsequent point of increase, the amount of delta that MMs have to hedge grows at an accelerating pace. Each of the pebbles under Indiana's feet knocks loose a larger rock, which then gets a boulder moving...
(Short squeezes are similar, but depend on short interest driving up prices; not a necessary component, in this case.)
But note what happens to the gamma of the calls that used to be [F]OTM: as the price of the underlying moves toward those strikes, gamma (ddelta) becomes progressively larger - so for each subsequent point of increase, the amount of delta that MMs have to hedge grows at an accelerating pace. Each of the pebbles under Indiana's feet knocks loose a larger rock, which then gets a boulder moving...
(Short squeezes are similar, but depend on short interest driving up prices; not a necessary component, in this case.)
BWS, I had a thought running around in my head these past couple of days...
How do you think the markets would behave if options did not exist? Would they simply stay stagnant and move really slow over days and weeks?
There are several professionals here who are certainly more knowledgeable than me, and who'd be much better suited to exploring that question. But I'll note that the oldest book we have on trading, de la Vega's "Confusion de Confusiones" written in 1688 - really the very beginnings of the market as we know it (and a wonderful read!) - already describes options trading, and the basic principle goes back much further than that. Thales of Miletus reputedly bought calls on olive presses in the 6th century BCE... and I have zero doubt that some caveman offered another caveman a tasty lizard now so he'd have the right to hunt the aurochs in the next herd they discovered later.
I don't think of options as some additional, external thing that got bolted onto the market because some clever boffin thought it up; side bets/derivatives are an unavoidable, natural part of any primary betting or trading scheme. As a class, I'd also say they add liquidity (which decreases volatility), provide a much greater range of flexibility in financial operations (a necessity in a large and complex economy), and make the market more accessible to the general public. They also require more sophistication to use, but that's usually the nature of derivatives...
In short, asking how markets would behave without options is something like asking "how would poker work without betting?" We can be fairly certain that the desire for gain came first - and all games/means of wagering were a consequence of it.
I was reading along in your post just fine, enjoying your text until I came across that word which you can see I have emphasized...My mind hit a fucking wall there.
Dude, man, NOBODY has ever used that word on this forum, or anywhere else, in like 30 years, minimum, outside of continental Europe. Dude, you are not a normal person.
I fucking LOVE that. C'Mon, tell me, what planet are you from, because it is not earth.
I edited an international publication (Linux Gazette) for years, so I have all kinds of Aussie, Kiwi, Hindi, Queens' English, etc. bits rattling around in my head, and they can surface at unpredictable times. Read what I write at your own risk; it's guaranteed to mess with your noggin sooner or later.
Had someone submit an article about a remotely-controlled geyser once...
Easy to answer, look at stock market before 1970s. there were no options. Pretty similar is answer.