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Some of this can also be a totally legitimate result of putting dealers short gamma. When options dealers are short contracts, their delta hedging activity (ie,

Some of this can also be a totally legitimate result of putting dealers short gamma. When options dealers are short contracts, their delta hedging activity (ie, their effort to reduce first-order risk to the share price by buying or selling a commensurate amount of stock) contributes to the momentum of a large move, because dealers' hedges chase the stock. If this explanation is unsatisfactory, look up "short gamma" on google. In other words, demand for volatility via buying options can actually beget volatility in the movement of the stock price.

hrdwdmrbl 7y ago
I love finding comments like this where I understand very little. (I am not being sarcastic). Excellent for learning.
- deleted 7y ago
  [deleted]
- goldmanballsack 7y ago
  It's a bunch of mumbo jumbo from someone that takes the academic side of finance too seriously (LTCM anyone?). In plain English: Options are basically a contract, with a time limit, that states the holder can buy a certain amount of stock at a certain price. "Options dealers" are the people who wrote the contract and sold it to another party. They are on the "hook" for fulfilling the terms, if the buying party wishes to "exercise" an option and buy their promised stock at the promised price. Options dealers are automatically "short" all of the contracts they sell, because that's literally the definition of "shorting" -- selling something you don't own. Options dealers technically do not own the stock they're promising to sell to the buyer, but will have to once the buyer "exercises" the options contract. Delta is basically the difference in velocity of the price of the options contract vs. the price of the stock it's representing. So, if the option is selling for $10, and has a delta of 1 (100%), then a $5 increase in the stock price will increase the option contracts price by $5 to $15. If the delta is 0 (0%), the price of the contract will not change. Actually, I was wrong. The GP was correct to use the vocabulary he did -- because what I wrote isn't even the full explanation I was planning. However, three paragraphs in, I realized it would take much more to completely explain it. Basically, options dealers hedge by buying the stock they issue options contracts for, and this can cause the price to move up.
  - totalZero 7y ago
    I am one of the best options traders in the world. Options dealers don't necessarily sell options. They can also buy them. And "writing" an option means to sell it, so "wrote the contract and sold it" is redundant. Options dealers are not automatically short all of the contracts that they sell. They may already have a long position in that option contract, in which case their sale is a closing sale. Also, I think you may be a bit confused...a short sale of options is not determined based on one's position in the underlying; you can be short an option and long the stock at the same time (for example, an overwrite is a sale of upside calls by someone who is already long the stock). Delta is the first-order change of the option contract value, with respect to a unit change in the underlying price. I wouldn't refer to it at "velocity" because while I understand what you are intending to communicate (it is a rate), there is another options Greek called "speed," which is the change in gamma with respect to the underlying price. Wikipedia has a really nice description of the various options Greeks. For the truly curious, Sheldon Natenberg wrote a nice book called "Options Volatility and Pricing" that explains the Greeks better than I or Wikipedia can. Options dealers who are short gamma will hedge by buying stock as it goes up, and selling stock as it goes down. Their demand for (or supply of) the underlying stock will impact the underlying price in a way that pushes the price in whatever direction it has already started to move. In defense of my word choice: theory and practice are not mutually exclusive. If you want to be excellent at something, you should aim to learn both. BTW I have never taken an academic course on options or finance.
    - vikramkr 7y ago
      A comment I'm sure you expected you'd get on this forum: you're gonna have to elaborate a bit on/defend a bit that opening line there about being one of the best options traders in the world.
      - robocat 7y ago
        > I am one of the best options traders in the world. The best traders in the world are worth billions? So the above translates to "I am a billionaire". Seems unlikely!
- PebblesRox 7y ago
  If you’re interested in learning more about finance, I recommend subscribing to Money Stuff (free daily finance newsletter). Matt Levine does a great job of explaining concepts like these to a layperson and I love his sense of humor. https://www.bloomberg.com/opinion/articles/2020-02-26/reddit-posters-pick-the-stocks-now https://www.bloomberg.com/opinion/articles/2020-02-26/reddit...
  - hrdwdmrbl 7y ago
    Thank you for the recommendation. I'm already pretty deep in to a lot of economics and finance newsletters and podcasts. I am also familiar with Matt's work, though not a direct follower. I hear great things though!
hnews_account_1 7y ago
Yeah but I mean if you need to hedge fucking 5 delta deeeeep otm options, you don't need that much stock buying to get your book theoretically delta neutral. I know short gamma markets are a real occurrence on the dealer end, but that happens from institutional money. No one retail is going to be able to move this stuff (unless it's Warren buffett going in big on derivatives for some funny reason).

hrdwdmrbl 7y ago

I love finding comments like this where I understand very little. (I am not being sarcastic). Excellent for learning.

deleted 7y ago
[deleted]
goldmanballsack 7y ago
It's a bunch of mumbo jumbo from someone that takes the academic side of finance too seriously (LTCM anyone?). In plain English: Options are basically a contract, with a time limit, that states the holder can buy a certain amount of stock at a certain price. "Options dealers" are the people who wrote the contract and sold it to another party. They are on the "hook" for fulfilling the terms, if the buying party wishes to "exercise" an option and buy their promised stock at the promised price. Options dealers are automatically "short" all of the contracts they sell, because that's literally the definition of "shorting" -- selling something you don't own. Options dealers technically do not own the stock they're promising to sell to the buyer, but will have to once the buyer "exercises" the options contract. Delta is basically the difference in velocity of the price of the options contract vs. the price of the stock it's representing. So, if the option is selling for $10, and has a delta of 1 (100%), then a $5 increase in the stock price will increase the option contracts price by $5 to $15. If the delta is 0 (0%), the price of the contract will not change. Actually, I was wrong. The GP was correct to use the vocabulary he did -- because what I wrote isn't even the full explanation I was planning. However, three paragraphs in, I realized it would take much more to completely explain it. Basically, options dealers hedge by buying the stock they issue options contracts for, and this can cause the price to move up.
- totalZero 7y ago
  I am one of the best options traders in the world. Options dealers don't necessarily sell options. They can also buy them. And "writing" an option means to sell it, so "wrote the contract and sold it" is redundant. Options dealers are not automatically short all of the contracts that they sell. They may already have a long position in that option contract, in which case their sale is a closing sale. Also, I think you may be a bit confused...a short sale of options is not determined based on one's position in the underlying; you can be short an option and long the stock at the same time (for example, an overwrite is a sale of upside calls by someone who is already long the stock). Delta is the first-order change of the option contract value, with respect to a unit change in the underlying price. I wouldn't refer to it at "velocity" because while I understand what you are intending to communicate (it is a rate), there is another options Greek called "speed," which is the change in gamma with respect to the underlying price. Wikipedia has a really nice description of the various options Greeks. For the truly curious, Sheldon Natenberg wrote a nice book called "Options Volatility and Pricing" that explains the Greeks better than I or Wikipedia can. Options dealers who are short gamma will hedge by buying stock as it goes up, and selling stock as it goes down. Their demand for (or supply of) the underlying stock will impact the underlying price in a way that pushes the price in whatever direction it has already started to move. In defense of my word choice: theory and practice are not mutually exclusive. If you want to be excellent at something, you should aim to learn both. BTW I have never taken an academic course on options or finance.
  - vikramkr 7y ago
    A comment I'm sure you expected you'd get on this forum: you're gonna have to elaborate a bit on/defend a bit that opening line there about being one of the best options traders in the world.
    - robocat 7y ago
      > I am one of the best options traders in the world. The best traders in the world are worth billions? So the above translates to "I am a billionaire". Seems unlikely!
PebblesRox 7y ago
If you’re interested in learning more about finance, I recommend subscribing to Money Stuff (free daily finance newsletter). Matt Levine does a great job of explaining concepts like these to a layperson and I love his sense of humor. https://www.bloomberg.com/opinion/articles/2020-02-26/reddit-posters-pick-the-stocks-now https://www.bloomberg.com/opinion/articles/2020-02-26/reddit...
- hrdwdmrbl 7y ago
  Thank you for the recommendation. I'm already pretty deep in to a lot of economics and finance newsletters and podcasts. I am also familiar with Matt's work, though not a direct follower. I hear great things though!

hnews_account_1 7y ago

Yeah but I mean if you need to hedge fucking 5 delta deeeeep otm options, you don't need that much stock buying to get your book theoretically delta neutral. I know short gamma markets are a real occurrence on the dealer end, but that happens from institutional money. No one retail is going to be able to move this stuff (unless it's Warren buffett going in big on derivatives for some funny reason).