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The basic mechanism of this, in my understanding is: 1. Buy underlying shares. 2. Buy calls on those shares. 3. Market makers who sell you those

The basic mechanism of this, in my understanding is: 1. Buy underlying shares. 2. Buy calls on those shares. 3. Market makers who sell you those calls have to buy shares in the underlying stock to hedge (they run balanced books) 4. Demand for stock rises, stock price and calls increase in value 5. Use proceeds to buy more stock and options. Rinse, repeat. The "gamma squeeze" (which is how much the option value changes in relation to underlying stock price) refers to the part where options sellers have to hedge by buying stock. Essentially, the very act of buying calls in volume increases their value, allowing you to buy more and drive the price upwards.

srtjstjsj 6y ago
This is a crime, right?
- xenospn 6y ago
  I don't see how. The people buying the shares are not related to the market makers so as far as I can tell there's nothing illegal about that.
- itsoktocry 6y ago
  >This is a crime, right? Good question. On one hand, it's purely mechanical; it just works that way. On the other, it's hard to imagine doing it deliberately wouldn't be considered manipulation.
  - corin_ 6y ago
    The purpose of buying call options is to to make a profit. It's hard to imagine that buying them and doing nothing other than buying them could be considered illegal. That's not manipulating the system any more than Buffet manipulates the system every time he buys stock (by also sending out the message that he thinks the stock is worth buying, just because he bought it without even needing to say anything about it).
    - mumblemumble 6y ago
      It would come down to intent. If the intent of buying a lot of options is, "I want a big position," or, "I want to hedge a big position," sure, that's probably fine. If the intent is, "I want to influence the market in some way," not so much.
      - pfortuny 6y ago
        As long as there is no inside information, buying or selling should be perfectly legal, if done inside the legal limits.
        mumblemumble 6y ago
        That last "if" is the crux. Intent is a huge factor in what is and is not considered legal market behavior. For example, consider banging the close. Buying lots of futures at a certain time of day is not illegal in and of itself. But it's quite illegal if regulators show that your purpose in doing so was to influence the settlement price of some other asset in which you hold a position.
        WrtCdEvrydy 6y ago
        Wouldn't banging the close be priced into the market? Can you leverage buying a lot of calls or puts into making profit for yourself?
        tw600040 6y ago
        How are they going to prove intent?
        mumblemumble 6y ago
        It tends to involve things like subpoenas and depositions.
        valuearb 6y ago
        Trading on inside information shouldn't be illegal either, it actually benefits even market participants who don’t have access to it.
  - deleted 6y ago
    [deleted]
- quickthrowman 6y ago
  Why would buying derivatives be a crime? That doesn’t make any sense. If I buy 10 calls, the MM has to hedge. If SoftBank buys 100,000 calls, they just hedge more. How do you figure this is in any way remotely illegal? Buying shares also raises the price of shares, should that be illegal too?
  - astura 6y ago
    Well, market manipulation is illegal. I don't know enough about finance to know if this sort of activity is market manipulation or not though. There's a bunch of examples here; https://en.wikipedia.org/wiki/Market_manipulation https://en.wikipedia.org/wiki/Market_manipulation The US Securities Exchange Act defines market manipulation as "transactions which create an artificial price or maintain an artificial price for a tradable security".
    - quickthrowman 6y ago
      > I don’t know enough... Well, I do. Buying and holding call options is not market manipulation, full stop. Please provide an example of someone being penalized by the SEC for buying and holding call options without using insider information. You won’t, because buying call options is not market manipulation. Is it market manipulation when Buffett announces BH bought shares of a company and then the shares skyrocket?
      - pmiller2 6y ago
        Part of the difference here is that BH is legally obligated to disclose when they buy shares of companies. At least, they are under certain circumstances, which I can’t remember off the top of my head. You can’t punish someone for something they’re legally obligated to do, because one can’t be legally obligated to commit a crime.
        quickthrowman 6y ago
        True, they are obligated to disclose their positions in a quarterly report. That doesn’t change the fact that buying and holding options is not illegal...
AndrewBissell 6y ago
Also, gamma has a kind of self-reinforcing feedback loop. When the options are initially way OTM the market makers only need to hedge with a small amount of the underlying. But as the price runs closer to the option strikes the delta impact of a given move becomes larger and larger, so MMs have to hedge with more and more of the underlying, which can itself push the price farther in the same direction.
- quickthrowman 6y ago
  And then the options expire, MMs unwind their hedges and gamma comes back down. There’s no infinite gamma trick
  - AndrewBissell 6y ago
    Yes, obviously the reflexivity does not proceed ad infinitum, but these dynamics are often responsible for extremely violent moves in the short term. The effects can be even more pronounced right before expiration. http://m.koreatimes.co.kr/pages/article.amp.asp?newsIdx=77682 http://m.koreatimes.co.kr/pages/article.amp.asp?newsIdx=7768...
    - quickthrowman 6y ago
      Indeed, gamma squeezes can produce lots of volatility near OpEx. And call rolling can just push the gamma further out for another squeeze come the next OpEx.
colinmhayes 6y ago
gamma is the derivative of how much option values change in relation to underlying stock price.
- stygiansonic 6y ago
  To clarify it’s actually the second derivative of the options price w.r.t the underlying price, whereas “delta” is the first derivative of the same. (So gamma is the rate of change of delay w.r.t the options price since delta is not constant)
  - stygiansonic 6y ago
    Sorry, I had a few typos and can’t edit. Gamma is the rate of change of delta w.r.t the underlying price. For example OTM calls have a delta close to 0. As the underlying price increases the delta will increase. When the underlying price reaches the call strike price (ATM) the delta will typically be 0.5. As the underlying price continues to rise and the call becomes deep ITM the delta will approach 1.0.
tobtoh 6y ago
So that would imply that for Softbank, high gamma stocks are desirable for this scheme? As in they want the maximum 'reaction' from each purchase they make? Also, this works in reverse right? So Softbank is literally just creating a stock market bubble since the price rises are not built on anything fundamental?
- omgwtfbyobbq 6y ago
  I think how much of a bubble depends on the specifics of the stocks they're doing this with. If the stocks they're choosing have high gamma because there's a lot of short interest, then some of this increase could be shorts transferring equity to longs when they cover, which wouldn't be a bubble per say. Historically low interest rates could also fuel this directly by providing extremely low interest capital and indirectly by pushing investors in general to chase yields in equities. That would be more bubble-like, but it also applies to other asset classes, and it's ultimately a function of central bank policy.
fluffything 6y ago
You forgot "6. Sell all underlying shares and calls before everything collapses". At some point, market makers shouldn't be able to sell you more calls. That's when you dump.
- PhantomGremlin 6y ago
  And, of course, when you dump, market makers need to also dump to reduce their exposure. There's a potential for some seriously crazy non-linear feedback.
listenupfolks 6y ago
Ok, for all of you out there who think this is so illegal... you’re confusing immoral vs illegal. Anyone who buys large amounts of a financial instrument is knowingly influencing the market price. Some folks on here have mentioned Berkshire Hathaway, who is notably trying to NOT inflate prices while buying; the mere knowledge that they are tends to send prices higher. What SoftBank did is probably wrong, but it’s not illegal. The markers are a casino, it’s all betting prices go one way or the other. SoftBank doubled down on their purchases through options, which is legal. The point up for debate is intent, if they intended to manipulate prices, they are criminals. But when has anyone ever proved intent alone? That’s not an avenue to enforce market regulations, that just leads to thought police. What we all need to accept, is that no matter what financial transaction rules are in place, someone, somewhere will find a way to manipulate them to their advantage without overtly breaking them. It has always been this way, and always will. The smart win, and the fools are quickly parted from their money. Stop bitching, and stop buying Tesla at a 1200 PE. Xoxo xoxo - me
- Rury 6y ago
  Regardless of intent, or if manipulation is happening in this case, or whether or not it is currently legal, this type of activity potentially allows for someone to artificially manipulate prices to their advantage at the cost of other market participants. Hence, why shouldn't we make such activity illegal for this reason alone? Why leave a now obvious loophole in our financial system, that could be potentially be abused? We made wash sales trading illegal. Why shouldn't this pattern of activity also be made illegal - when wash sales trading is deemed illegal? If your argument is abuse will happen anyways - why even bother having any financial laws?

srtjstjsj 6y ago

This is a crime, right?

xenospn 6y ago
I don't see how. The people buying the shares are not related to the market makers so as far as I can tell there's nothing illegal about that.
itsoktocry 6y ago
>This is a crime, right? Good question. On one hand, it's purely mechanical; it just works that way. On the other, it's hard to imagine doing it deliberately wouldn't be considered manipulation.
- corin_ 6y ago
  The purpose of buying call options is to to make a profit. It's hard to imagine that buying them and doing nothing other than buying them could be considered illegal. That's not manipulating the system any more than Buffet manipulates the system every time he buys stock (by also sending out the message that he thinks the stock is worth buying, just because he bought it without even needing to say anything about it).
  - mumblemumble 6y ago
    It would come down to intent. If the intent of buying a lot of options is, "I want a big position," or, "I want to hedge a big position," sure, that's probably fine. If the intent is, "I want to influence the market in some way," not so much.
    - pfortuny 6y ago
      As long as there is no inside information, buying or selling should be perfectly legal, if done inside the legal limits.
      - mumblemumble 6y ago
        That last "if" is the crux. Intent is a huge factor in what is and is not considered legal market behavior. For example, consider banging the close. Buying lots of futures at a certain time of day is not illegal in and of itself. But it's quite illegal if regulators show that your purpose in doing so was to influence the settlement price of some other asset in which you hold a position.
        WrtCdEvrydy 6y ago
        Wouldn't banging the close be priced into the market? Can you leverage buying a lot of calls or puts into making profit for yourself?
        tw600040 6y ago
        How are they going to prove intent?
        mumblemumble 6y ago
        It tends to involve things like subpoenas and depositions.
      - valuearb 6y ago
        Trading on inside information shouldn't be illegal either, it actually benefits even market participants who don’t have access to it.
- deleted 6y ago
  [deleted]
quickthrowman 6y ago
Why would buying derivatives be a crime? That doesn’t make any sense. If I buy 10 calls, the MM has to hedge. If SoftBank buys 100,000 calls, they just hedge more. How do you figure this is in any way remotely illegal? Buying shares also raises the price of shares, should that be illegal too?
- astura 6y ago
  Well, market manipulation is illegal. I don't know enough about finance to know if this sort of activity is market manipulation or not though. There's a bunch of examples here; https://en.wikipedia.org/wiki/Market_manipulation https://en.wikipedia.org/wiki/Market_manipulation The US Securities Exchange Act defines market manipulation as "transactions which create an artificial price or maintain an artificial price for a tradable security".
  - quickthrowman 6y ago
    > I don’t know enough... Well, I do. Buying and holding call options is not market manipulation, full stop. Please provide an example of someone being penalized by the SEC for buying and holding call options without using insider information. You won’t, because buying call options is not market manipulation. Is it market manipulation when Buffett announces BH bought shares of a company and then the shares skyrocket?
    - pmiller2 6y ago
      Part of the difference here is that BH is legally obligated to disclose when they buy shares of companies. At least, they are under certain circumstances, which I can’t remember off the top of my head. You can’t punish someone for something they’re legally obligated to do, because one can’t be legally obligated to commit a crime.
      - quickthrowman 6y ago
        True, they are obligated to disclose their positions in a quarterly report. That doesn’t change the fact that buying and holding options is not illegal...

AndrewBissell 6y ago

Also, gamma has a kind of self-reinforcing feedback loop. When the options are initially way OTM the market makers only need to hedge with a small amount of the underlying. But as the price runs closer to the option strikes the delta impact of a given move becomes larger and larger, so MMs have to hedge with more and more of the underlying, which can itself push the price farther in the same direction.

quickthrowman 6y ago
And then the options expire, MMs unwind their hedges and gamma comes back down. There’s no infinite gamma trick
- AndrewBissell 6y ago
  Yes, obviously the reflexivity does not proceed ad infinitum, but these dynamics are often responsible for extremely violent moves in the short term. The effects can be even more pronounced right before expiration. http://m.koreatimes.co.kr/pages/article.amp.asp?newsIdx=77682 http://m.koreatimes.co.kr/pages/article.amp.asp?newsIdx=7768...
  - quickthrowman 6y ago
    Indeed, gamma squeezes can produce lots of volatility near OpEx. And call rolling can just push the gamma further out for another squeeze come the next OpEx.

colinmhayes 6y ago

gamma is the derivative of how much option values change in relation to underlying stock price.

stygiansonic 6y ago
To clarify it’s actually the second derivative of the options price w.r.t the underlying price, whereas “delta” is the first derivative of the same. (So gamma is the rate of change of delay w.r.t the options price since delta is not constant)
- stygiansonic 6y ago
  Sorry, I had a few typos and can’t edit. Gamma is the rate of change of delta w.r.t the underlying price. For example OTM calls have a delta close to 0. As the underlying price increases the delta will increase. When the underlying price reaches the call strike price (ATM) the delta will typically be 0.5. As the underlying price continues to rise and the call becomes deep ITM the delta will approach 1.0.

tobtoh 6y ago

So that would imply that for Softbank, high gamma stocks are desirable for this scheme? As in they want the maximum 'reaction' from each purchase they make? Also, this works in reverse right? So Softbank is literally just creating a stock market bubble since the price rises are not built on anything fundamental?

omgwtfbyobbq 6y ago
I think how much of a bubble depends on the specifics of the stocks they're doing this with. If the stocks they're choosing have high gamma because there's a lot of short interest, then some of this increase could be shorts transferring equity to longs when they cover, which wouldn't be a bubble per say. Historically low interest rates could also fuel this directly by providing extremely low interest capital and indirectly by pushing investors in general to chase yields in equities. That would be more bubble-like, but it also applies to other asset classes, and it's ultimately a function of central bank policy.

fluffything 6y ago

You forgot "6. Sell all underlying shares and calls before everything collapses". At some point, market makers shouldn't be able to sell you more calls. That's when you dump.

PhantomGremlin 6y ago
And, of course, when you dump, market makers need to also dump to reduce their exposure. There's a potential for some seriously crazy non-linear feedback.

listenupfolks 6y ago

Ok, for all of you out there who think this is so illegal... you’re confusing immoral vs illegal. Anyone who buys large amounts of a financial instrument is knowingly influencing the market price. Some folks on here have mentioned Berkshire Hathaway, who is notably trying to NOT inflate prices while buying; the mere knowledge that they are tends to send prices higher. What SoftBank did is probably wrong, but it’s not illegal. The markers are a casino, it’s all betting prices go one way or the other. SoftBank doubled down on their purchases through options, which is legal. The point up for debate is intent, if they intended to manipulate prices, they are criminals. But when has anyone ever proved intent alone? That’s not an avenue to enforce market regulations, that just leads to thought police. What we all need to accept, is that no matter what financial transaction rules are in place, someone, somewhere will find a way to manipulate them to their advantage without overtly breaking them. It has always been this way, and always will. The smart win, and the fools are quickly parted from their money. Stop bitching, and stop buying Tesla at a 1200 PE. Xoxo xoxo - me

Rury 6y ago
Regardless of intent, or if manipulation is happening in this case, or whether or not it is currently legal, this type of activity potentially allows for someone to artificially manipulate prices to their advantage at the cost of other market participants. Hence, why shouldn't we make such activity illegal for this reason alone? Why leave a now obvious loophole in our financial system, that could be potentially be abused? We made wash sales trading illegal. Why shouldn't this pattern of activity also be made illegal - when wash sales trading is deemed illegal? If your argument is abuse will happen anyways - why even bother having any financial laws?