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Everyone buying put options, expecting doom and gloom, is contributing to keeping the markets high. When you buy a put, the market maker sells a put and stays
by ringaroundthetx 9y ago
Everyone buying put options, expecting doom and gloom, is contributing to keeping the markets high.
When you buy a put, the market maker sells a put and stays delta neutral by buying shares (or more generally, goes long the underlying asset). When everyone buys puts, everyone is making shares get bought.
The puts expire worthless and no affect was done to the market except keeping it bullish.
edit: I got that wrong, way wrong. Is there any way that hedging is having the effect of buoying the market?
- misja111 9y agoThat's only half the story. To stay completely delta and gamma neutral, the market maker typically buys not just the share but additionally shorts a call with the same strike as the put. When he shorts the call it means that someone else buys it. Probably another market maker, who might want to hedge as well, this time by selling the share and buying a put, etc..
- lukewink 9y agoIf a market maker sells a put and wants to stay delta neutral, they would need to sell shares -- not buy. Selling a put is a long position, not a short.