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Doesn't this work as an argument against cash-settling options and futures? Owning a giant pile of call options and driving the price up during the settlement w

Doesn't this work as an argument against cash-settling options and futures? Owning a giant pile of call options and driving the price up during the settlement window doesn't help you any if you have to unload a massive quantity of the underlying stock.

lordnacho 9y ago
Forgot to mention it was mainly indexes I was talking about, and they are cash settled. Single stock options tend to be settled with actual stock, and at least in Europe tend to be a lot less liquid. And there's other problems with trading them, like other people knowing a lot more than the market maker about what's happening. You also have pin risk which seems to be like a magnet.
- ThrustVectoring 9y ago
  Yeah, sorry if that wasn't clear - I was thinking that the manipulation you saw with the options on index was because they were cash settled. If they were physically settled (somehow), then it doesn't help you to be the buyer at an arbitrarily high price of the underlying. You have to sell the underlying to profit off of the call options, you can't just support the price against all comers at the time of exercise.
- formerjpl 9y ago
  I'm really not understanding how someone could manipulate index futures (or options on futures, which, in the US, are subject to stock-type settlement). The "Final Settlement" on an index future is determined by the settled value of the underlying index. Any discrepency between the index future and the underlying index near expiration would result in an easy arbitrage opportunity. Are you implying that, close to expiration, a large player would move the index, in order to move their option position in the money? In the case of ES, that would imply buying an impossibly large of amount of SP500 assets---which they would have to liquidate at some point after the ES settlement or liquidation... Also not understanding your point on pin risk, pinning is the result of maintaining a delta neutral hedge, which is a well known strategy...

lordnacho 9y ago

Forgot to mention it was mainly indexes I was talking about, and they are cash settled. Single stock options tend to be settled with actual stock, and at least in Europe tend to be a lot less liquid. And there's other problems with trading them, like other people knowing a lot more than the market maker about what's happening. You also have pin risk which seems to be like a magnet.

ThrustVectoring 9y ago
Yeah, sorry if that wasn't clear - I was thinking that the manipulation you saw with the options on index was because they were cash settled. If they were physically settled (somehow), then it doesn't help you to be the buyer at an arbitrarily high price of the underlying. You have to sell the underlying to profit off of the call options, you can't just support the price against all comers at the time of exercise.
formerjpl 9y ago
I'm really not understanding how someone could manipulate index futures (or options on futures, which, in the US, are subject to stock-type settlement). The "Final Settlement" on an index future is determined by the settled value of the underlying index. Any discrepency between the index future and the underlying index near expiration would result in an easy arbitrage opportunity. Are you implying that, close to expiration, a large player would move the index, in order to move their option position in the money? In the case of ES, that would imply buying an impossibly large of amount of SP500 assets---which they would have to liquidate at some point after the ES settlement or liquidation... Also not understanding your point on pin risk, pinning is the result of maintaining a delta neutral hedge, which is a well known strategy...