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Options market makers, the critical mass of dynamic hedgers, don’t blow up any more I wonder if that's true in insanely volatile stocks like GME? People were b
by PhantomGremlin 6y ago
Options market makers, the critical mass of dynamic hedgers, don’t blow up any more
I wonder if that's true in insanely volatile stocks like GME? People were buying way OTM calls on that stock. Then the stock would move 50% in one day. A market maker would have to be very good at dynamic hedging to keep up with that.
Of course options market makers have one incredible thing going for them. While they have market risk for every individual option they write, their net exposure can potentially be very small. That only works for a market maker, not for someone making a directional bet because YOLO.
Edit: The few times I tried to study what was going on with GME options, I saw a lot of "no bid" on many OTM strikes. So it looks like the market makers were simply stepping away. Which totally changes the market dynamics. If there's no liquidity in an option, a punter's only choice is to hold to expiration? That's financially very risky and also counter to everything we've come to believe about an "efficient" market.
- JumpCrisscross 6y ago> lot of "no bid" on many OTM strikes. So it looks like the market makers were simply stepping away Bingo. Self help [1] and circuit breakers [2] negate the unsolvable edge case: large, instantaneous price movements. [1] https://www.reuters.com/article/usa-options-cboe-idUSL2N1H40MR https://www.reuters.com/article/usa-options-cboe-idUSL2N1H40... [2] https://www.npr.org/2020/03/09/813682567/how-stock-market-circuit-breakers-work https://www.npr.org/2020/03/09/813682567/how-stock-market-ci...
- stainforth 6y agoAll that promise that innovation like HFT among other things was fine because of the value liquidity they can provide and now they can just choose to not play if they don't want to.
- tedunangst 6y agoNear the money GME options are super liquid with tight spreads, exactly as promised. If you're holding GME, but you're worried about an earning surprise, you can put on a collar for like zero cost, which is pretty crazy considering the insane volatility. Exactly what the people who said they wanted the markets to support meaningful transactions instead of speculation asked for. Nobody ever promised you'd get easy access to 1000:1 yolo lottery tickets.