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To add something to this: The redditor doesn't need to pay 1 dollar per cow (the market price as sold by fund), the redditor pays .01 cents for an option contr
by 0xB31B1B 6y ago
To add something to this:
The redditor doesn't need to pay 1 dollar per cow (the market price as sold by fund), the redditor pays .01 cents for an option contract to buy the cow for 2 dollars at the end of the month. The options contract requires the bank selling the contract to buy a cow today. In effect, the redditor is able to force the bank to buy 100 cows by spending only 1 cent.
- onlyrealcuzzo 6y agoNo. It's a lot more complicated than you buy a call option and the brokerage buys 100 shares immediately.
- 0xB31B1B 6y agoYea, but we’re describing the basic mechanics of what’s happening, we don’t need to get into the details of delta hedging. The basic mechanic is that large groups of folks buying Out of the money calls results in the sellers of those options buying shares to offset risk in the trade. In effect, in an env where lots of shares are locked up due to shorts, an cash efficient way to cause a squeeze is to buy out out of the money options, causing more shares to be bought to offset risk, sending the price up.
- Thorrez 6y agoThe bank has to buy the cows right away? I thought when the redditor buys the call someone else, let's say Bob, sells the call. If Bob already owns 100 cows (covered calls), then no one will be forced to buy cows ever. If Bob doesn't own 100 cows (naked calls), Bob will have to buy 100 cows at the end of the month if the call is in the money, not right away.