3 ms·

Yea, this theory isn't a WSB theory though they may have coined the "Gamma Squeeze" term. The shorts are mostly FinTwit types on Twitter. What about the tactic

Yea, this theory isn't a WSB theory though they may have coined the "Gamma Squeeze" term. The shorts are mostly FinTwit types on Twitter. What about the tactic though? As someone who understands this better than most, does it make sense that buying way out of the money calls on a stock like Tesla are a cheap way to goose it's share price higher? I don't understand all the nuts and bolts of market making, but it seems weird to me that a MM would buy even 1 share in Tesla because someone spent $10 to buy a $1000 strike price contract the day before it expires.

Traster 5y ago
Not the person you were replying to, but broadly, Market makers delta hedge in the future. What this means is you take your option, you figure out how much the price depends on the future, and that's your delta. An at the money option will have a delta close to 1 - ie, if the future moves $1, the option price will basically move $1 too. So I can hedge my exposure to the option I just bought or sold by just buying or selling the same amount of the future in the opposite direction. A far out of the money option will have a delta close to 0, it's price isn't going to move much when the future moves since it's still incredibly unlikely to come into the money and actually be worth exercising. So in order to hedge an option, the market maker only has to buy a tiny tiny amont of future to hedge the delta (or may not even hedge because they're willing to take some exposure to delta for some period of time, or their net delta position due to other options they've bought or sold cancels it out). So the plan of "I'll buy these super out of the money options to force market makers to hedge" doesn't make a lot of sense - since for each option you buy the market maker only has to buy a tiny tiny amount of futures, and you could be buying 100 call options and find that all your purchases have been cancelled out by the market maker buying a single call at the money - not even touching the future. Now if the out of the money call options are cheap enough it could be more effective against the price that just buying the future, but that's incredibly unlikely, market makers aren't stupid and for these extremely out of the money options they're probably already charging a premium since they're difficult to accurately price. Meanwhile, is the price of the underlying the only thing that causes the price to change? No. Gamma (or the value of the time between when you bought and the time to expiry) is a compenent, that's going to collapse coming into the last days of the option so you're paying for that. Volatility also effects the price, and you're probably paying a premium for protection against volatility that you're actually hoping against.

Traster 5y ago

Not the person you were replying to, but broadly, Market makers delta hedge in the future. What this means is you take your option, you figure out how much the price depends on the future, and that's your delta. An at the money option will have a delta close to 1 - ie, if the future moves $1, the option price will basically move $1 too. So I can hedge my exposure to the option I just bought or sold by just buying or selling the same amount of the future in the opposite direction. A far out of the money option will have a delta close to 0, it's price isn't going to move much when the future moves since it's still incredibly unlikely to come into the money and actually be worth exercising. So in order to hedge an option, the market maker only has to buy a tiny tiny amont of future to hedge the delta (or may not even hedge because they're willing to take some exposure to delta for some period of time, or their net delta position due to other options they've bought or sold cancels it out). So the plan of "I'll buy these super out of the money options to force market makers to hedge" doesn't make a lot of sense - since for each option you buy the market maker only has to buy a tiny tiny amount of futures, and you could be buying 100 call options and find that all your purchases have been cancelled out by the market maker buying a single call at the money - not even touching the future. Now if the out of the money call options are cheap enough it could be more effective against the price that just buying the future, but that's incredibly unlikely, market makers aren't stupid and for these extremely out of the money options they're probably already charging a premium since they're difficult to accurately price. Meanwhile, is the price of the underlying the only thing that causes the price to change? No. Gamma (or the value of the time between when you bought and the time to expiry) is a compenent, that's going to collapse coming into the last days of the option so you're paying for that. Volatility also effects the price, and you're probably paying a premium for protection against volatility that you're actually hoping against.