4 ms·

Isn't there also a massive counterparty risk, since you're trying to claim money when everyone else has lost money?

• nradov 3y ago
  For publicly traded options there isn't much counterparty risk unless the financial system completely melts down. Counterparty risk is more of an issue with other derivatives traded off market. That risk can sometimes be partially hedged, for example by purchasing credit default swaps on the counterparty.
• lordnacho 3y ago
  It's a risk, not something that you couldn't deal with. You have to have a sensible prime broker mainly. Any of the big ones will have systems in place to protect them well in advance of you putting on this huge put option. The only guys who would blow up from this were merged earlier this year. This is assuming the entire trade is just S&P500 puts of course. A proper doom merchant might put it on in a bunch of ways, with various swaps against counterparties in different assets. It's really just OTC risk you'd care about but again if your PB isn't incompetent you will know where you can do this.