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Can someone explain the mechanics of this specific trade to a noob? The trader bought 550k options yesterday for SPLK to hit $127/share? Since that seemed highl

by bryan0 3y ago

Can someone explain the mechanics of this specific trade to a noob? The trader bought 550k options yesterday for SPLK to hit $127/share? Since that seemed highly unlikely they were only priced at $.04 each. but now that SPLK is at $145/share they are worth $18 each? so that would be a profit of ~$10m?

thathndude 3y ago
No explanation needed. You got it. An options contract gives you the right to buy or sell a security to a counterparty at a fixed price at any time on or before the expiration date. As you note, the chances of being able to buy a share from someone on or before Friday for $127 (when the stock was publicly trading below that) was near valueless ($.04). Not anymore!
- paws 3y ago
  Could you please explain more about who these counterparties are exactly? Do they include brokerages? I'm trying to understand why a counterparty would enter into an arrangement where a stock price change obligates them to financial liability like this. Presumably there's some upside if the stock price goes the other way, but it's unclear who the $ would come from in that case. Also: Who originates options? When someone buys an option, is it the brokerage who collects the fees? Is the counterparty already involved at that point?
  - wallawe 3y ago
    Let's say I own a bunch of SPLK and want to make some passive income. I am the counterparty to the call purchaser in this example. I can sell call options 10% out of the money each week and make some nice cash. If my plan was to hold the stock long term, there's no downside risk because if the stock goes down, I get to keep the cash (premium) from selling the calls. If it goes sideways or slightly up I get to keep it as well. The only "downside" is it goes up >10% in which case i've made that 10% + premium, but I've now had my stock taken away from me. In this case, I lose out on an additional 10% in upside because it went up 20% overnight.
    - 0cf8612b2e1e 3y ago
      That still seems like a pretty good deal. You missed out on capturing the entire upside, but lost no real money. Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case. In the typical case, you can continue to collect those pennies.
      - owenmarshall 3y ago
        > In the typical case, you can continue to collect those pennies. Top notch comment, considering options trading is often described as "picking up pennies in front of a steamroller." > Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case You don't come out ahead in the worst case – the option you wrote can settle deep ITM and you are compelled to sell a stock at a loss. Worst case you could lose a major chunk of change.
        OkayPhysicist 3y ago
        > You don't come out ahead in the worst case But you were offering it based on the market price when you offered it. The "loss" is merely one of opportunity, you're not actually losing any value you had when you sold the option, right?
        lsaferite 3y ago
        If you sold the option and don't hold the stock then you are exposed to essentially uncapped losses.
        deleted 3y ago
        [deleted]
        0cf8612b2e1e 3y ago
        Listed scenario started by saying you own SPLK.
  - deleted 3y ago
    [deleted]
yCombLinks 3y ago
I mean, it sounds like you have it, what's the question
adocomplete 3y ago
You pretty much explained it yourself. The price of SPLK had no reason to jump to or beyond $127 without some catalyst event so the options were almost worthless. But with the acquisition, the stock had a catalyst and with the share price jumping to $145, those options gained a crap load of intrinsic value (basically the difference of $145 - $127). Now either the purchaser got really really lucky or had insider information that the acquisition was going to happen. The latter seems much more likely.
- myself248 3y ago
  > without some catalyst event Most subtle Cisco joke in the whole thread. Hat tip.
TuringNYC 3y ago
I know options well, but I dont understand how spreads didnt react to this volume. Wouldnt the asks go higher and higher and higher with that volume? Also, what insane market maker would offer this much volume and take the downside risk? It isnt even clear how they would offlay such a risk unless they just happened to be holding 550k*100 SPLK shares
- slig 3y ago
  They hedge using the delta of the option and adjust accordingly.
  - TuringNYC 3y ago
    Sure, but the hedge would have raised prices across the vol surface? How did this go thru w/o raising the prices?
- mhuffman 3y ago
  >what insane market maker would offer this much volume and take the downside risk? At the time the downside risk was near zero, right? It was basically free money for them ... till it wasn't!
- yieldcrv 3y ago
  the market maker still collected $22,000 in premium if they bought shares after selling the options, thats motivation enough to fill the entire order at a good price before another market maker does. you can write unlimited options, so without scarcity the bid and asks don't have to change if the buyer can be a little patient. but if they only tried to keep up with the delta then they might not have bought enough shares and have some losses right now, on that one position they can take losses its a risk
eastdakota 3y ago
Yes. The one bit you’re missing is that a call option is the right to buy a stock at a certain price typically on or before a certain date. To make the numbers simple, imagine a stock trades at $10/share. If someone came to you and said: how much would you be willing to pay to have an option to buy the stock for $100/share? The correct answer is: it depends. If it’s the right to buy the stock for $100/share at any point over the next 10 years then that’s worth more than to buy the stock at $100/share in the next day. A stock trading at $10 is unlikely to jump to $100 in a day so the option to by it for $100 is not worth much. It could happen, so it’s worth something. But it’s unlikely. So, again to make the numbers simple, let’s say it’s worth $0.01/option to buy a stock at $100 in the next day when it’s trading at $10 today. Now imagine it’s the next day and the company with the $10 stock discovers the cure for cancer or invents time travel or perfects cold fusion. News breaks and now it’s trading at $1,000 per share. Now how much is the right to buy the stock at $100 per share worth? The answer is going to be something really close to, but maybe a small discount from, $1,000 (current value of the stock) - $100 (how much you pay based on the option) = $900. So what was worth $0.01 yesterday is worth $900 today. Let’s say you have $10,000 to invest. If you know in advance the news is going to break you can do two things to (probably illegally) try and profit from it. 1. Buy 1,000 shares of the stock for $10/share. 2. Buy 1,000,000 options to buy the stock for $100/share tomorrow with each option costing $0.01. With strategy 1 you spend $10,000 to buy something that, after the news breaks, is worth $1,000,000. Not bad. But with strategy 2 you spend $10,000 to buy something that’s worth $900,000,000 after the news breaks. In both cases you’re likely to at least be investigated. And strategy 2 seems especially suspicious because the risk is so high and the non-illegal reasons for doing it are so few and far between. Very few reasons you’d buy a bunch of call options that only pay off if something causes a stock to move dramatically in 24 hours. Finally, while short-dated, out-of-the-money call options are not something many if anyone should be playing with, they’re just a different flavor of something very familiar. To put it in context a lot of HN readers will understand more intuitively: a call option is what you often receive when you get equity in a startup. It’s the right to purchase shares at a price (strike price) before a certain amount of time (typically 10 years).
- matsemann 3y ago
  > And strategy 2 seems especially suspicious because the risk is so high and the non-illegal reasons for doing it are so few and far between. Very few reasons you’d buy a bunch of call options that only pay off if something causes a stock to move dramatically in 24 hours. But why are they then legal to sell? It almost seems like someone wants to be able to sell them, but when they lose the bet they want to revert it. Free money if you're on the correct side.
mrb 3y ago
Important note: he didn't buy 550k options, he bought 26k, for a total profit of $475k. The tweet is incorrect. See https://news.ycombinator.com/item?id=37602079 https://news.ycombinator.com/item?id=37602079
- vGPU 3y ago
  No. He bought 260 options, which translate into the right, but not the obligation to purchase 26k shares at a certain price. 260 options is WSB lotto territory. At $4 each, that’s a thousand dollar bet. We’re not exactly talking big money here.
  - vGPU 3y ago
    In fact, I was right. It was a WSB lotto trade. Guy is just a regular WSB trader who has made multiple trades on this ticker in the past.
  - mrb 3y ago
    I know it's 260 options, but I wrote "26k" as it's the right to buy 26k shares (1 option for 100 shares), for consistency with the parents who wrote 550k, meaning 5500 options to buy 550k shares.
    - vGPU 3y ago
      Correcting an error with an error, even for the sake of consistency, just perpetuates confusion. The average person probably doesn't even know what an option is, and your post could be read in multiple ways. He bought 26k options? 26k shares? $26k of either?
      - mrb 3y ago
        Ok, I agree with you.
gituliar 3y ago
I'm not sure this is a true story. Open Interest is 420 contracts, this is a max number of options someone can hold (for that strike and expiry). See the first line on the first screenshot, just below "Historical Volume / OI". Nobody could hold more than that much contract. Edit: The total contracts is 127, so it gives 127 x $18 x 100 ~ $230'000 profit. (Seems like the post on Twitter is missing x10 factor.)
deleted 3y ago
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by bryan0 3y ago

thathndude 3y ago

No explanation needed. You got it. An options contract gives you the right to buy or sell a security to a counterparty at a fixed price at any time on or before the expiration date. As you note, the chances of being able to buy a share from someone on or before Friday for $127 (when the stock was publicly trading below that) was near valueless ($.04). Not anymore!

paws 3y ago
Could you please explain more about who these counterparties are exactly? Do they include brokerages? I'm trying to understand why a counterparty would enter into an arrangement where a stock price change obligates them to financial liability like this. Presumably there's some upside if the stock price goes the other way, but it's unclear who the $ would come from in that case. Also: Who originates options? When someone buys an option, is it the brokerage who collects the fees? Is the counterparty already involved at that point?
- wallawe 3y ago
  Let's say I own a bunch of SPLK and want to make some passive income. I am the counterparty to the call purchaser in this example. I can sell call options 10% out of the money each week and make some nice cash. If my plan was to hold the stock long term, there's no downside risk because if the stock goes down, I get to keep the cash (premium) from selling the calls. If it goes sideways or slightly up I get to keep it as well. The only "downside" is it goes up >10% in which case i've made that 10% + premium, but I've now had my stock taken away from me. In this case, I lose out on an additional 10% in upside because it went up 20% overnight.
  - 0cf8612b2e1e 3y ago
    That still seems like a pretty good deal. You missed out on capturing the entire upside, but lost no real money. Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case. In the typical case, you can continue to collect those pennies.
    - owenmarshall 3y ago
      > In the typical case, you can continue to collect those pennies. Top notch comment, considering options trading is often described as "picking up pennies in front of a steamroller." > Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case You don't come out ahead in the worst case – the option you wrote can settle deep ITM and you are compelled to sell a stock at a loss. Worst case you could lose a major chunk of change.
      - OkayPhysicist 3y ago
        > You don't come out ahead in the worst case But you were offering it based on the market price when you offered it. The "loss" is merely one of opportunity, you're not actually losing any value you had when you sold the option, right?
        lsaferite 3y ago
        If you sold the option and don't hold the stock then you are exposed to essentially uncapped losses.
        deleted 3y ago
        [deleted]
        0cf8612b2e1e 3y ago
        Listed scenario started by saying you own SPLK.
- deleted 3y ago
  [deleted]

yCombLinks 3y ago

I mean, it sounds like you have it, what's the question

adocomplete 3y ago

You pretty much explained it yourself. The price of SPLK had no reason to jump to or beyond $127 without some catalyst event so the options were almost worthless. But with the acquisition, the stock had a catalyst and with the share price jumping to $145, those options gained a crap load of intrinsic value (basically the difference of $145 - $127). Now either the purchaser got really really lucky or had insider information that the acquisition was going to happen. The latter seems much more likely.

myself248 3y ago
> without some catalyst event Most subtle Cisco joke in the whole thread. Hat tip.

TuringNYC 3y ago

I know options well, but I dont understand how spreads didnt react to this volume. Wouldnt the asks go higher and higher and higher with that volume? Also, what insane market maker would offer this much volume and take the downside risk? It isnt even clear how they would offlay such a risk unless they just happened to be holding 550k*100 SPLK shares

slig 3y ago
They hedge using the delta of the option and adjust accordingly.
- TuringNYC 3y ago
  Sure, but the hedge would have raised prices across the vol surface? How did this go thru w/o raising the prices?
mhuffman 3y ago
>what insane market maker would offer this much volume and take the downside risk? At the time the downside risk was near zero, right? It was basically free money for them ... till it wasn't!
yieldcrv 3y ago
the market maker still collected $22,000 in premium if they bought shares after selling the options, thats motivation enough to fill the entire order at a good price before another market maker does. you can write unlimited options, so without scarcity the bid and asks don't have to change if the buyer can be a little patient. but if they only tried to keep up with the delta then they might not have bought enough shares and have some losses right now, on that one position they can take losses its a risk

eastdakota 3y ago

Yes. The one bit you’re missing is that a call option is the right to buy a stock at a certain price typically on or before a certain date. To make the numbers simple, imagine a stock trades at $10/share. If someone came to you and said: how much would you be willing to pay to have an option to buy the stock for $100/share? The correct answer is: it depends. If it’s the right to buy the stock for $100/share at any point over the next 10 years then that’s worth more than to buy the stock at $100/share in the next day. A stock trading at $10 is unlikely to jump to $100 in a day so the option to by it for $100 is not worth much. It could happen, so it’s worth something. But it’s unlikely. So, again to make the numbers simple, let’s say it’s worth $0.01/option to buy a stock at $100 in the next day when it’s trading at $10 today. Now imagine it’s the next day and the company with the $10 stock discovers the cure for cancer or invents time travel or perfects cold fusion. News breaks and now it’s trading at $1,000 per share. Now how much is the right to buy the stock at $100 per share worth? The answer is going to be something really close to, but maybe a small discount from, $1,000 (current value of the stock) - $100 (how much you pay based on the option) = $900. So what was worth $0.01 yesterday is worth $900 today. Let’s say you have $10,000 to invest. If you know in advance the news is going to break you can do two things to (probably illegally) try and profit from it. 1. Buy 1,000 shares of the stock for $10/share. 2. Buy 1,000,000 options to buy the stock for $100/share tomorrow with each option costing $0.01. With strategy 1 you spend $10,000 to buy something that, after the news breaks, is worth $1,000,000. Not bad. But with strategy 2 you spend $10,000 to buy something that’s worth $900,000,000 after the news breaks. In both cases you’re likely to at least be investigated. And strategy 2 seems especially suspicious because the risk is so high and the non-illegal reasons for doing it are so few and far between. Very few reasons you’d buy a bunch of call options that only pay off if something causes a stock to move dramatically in 24 hours. Finally, while short-dated, out-of-the-money call options are not something many if anyone should be playing with, they’re just a different flavor of something very familiar. To put it in context a lot of HN readers will understand more intuitively: a call option is what you often receive when you get equity in a startup. It’s the right to purchase shares at a price (strike price) before a certain amount of time (typically 10 years).

matsemann 3y ago
> And strategy 2 seems especially suspicious because the risk is so high and the non-illegal reasons for doing it are so few and far between. Very few reasons you’d buy a bunch of call options that only pay off if something causes a stock to move dramatically in 24 hours. But why are they then legal to sell? It almost seems like someone wants to be able to sell them, but when they lose the bet they want to revert it. Free money if you're on the correct side.

mrb 3y ago

Important note: he didn't buy 550k options, he bought 26k, for a total profit of $475k. The tweet is incorrect. See https://news.ycombinator.com/item?id=37602079 https://news.ycombinator.com/item?id=37602079

vGPU 3y ago
No. He bought 260 options, which translate into the right, but not the obligation to purchase 26k shares at a certain price. 260 options is WSB lotto territory. At $4 each, that’s a thousand dollar bet. We’re not exactly talking big money here.
- vGPU 3y ago
  In fact, I was right. It was a WSB lotto trade. Guy is just a regular WSB trader who has made multiple trades on this ticker in the past.
- mrb 3y ago
  I know it's 260 options, but I wrote "26k" as it's the right to buy 26k shares (1 option for 100 shares), for consistency with the parents who wrote 550k, meaning 5500 options to buy 550k shares.
  - vGPU 3y ago
    Correcting an error with an error, even for the sake of consistency, just perpetuates confusion. The average person probably doesn't even know what an option is, and your post could be read in multiple ways. He bought 26k options? 26k shares? $26k of either?
    - mrb 3y ago
      Ok, I agree with you.

gituliar 3y ago

I'm not sure this is a true story. Open Interest is 420 contracts, this is a max number of options someone can hold (for that strike and expiry). See the first line on the first screenshot, just below "Historical Volume / OI". Nobody could hold more than that much contract. Edit: The total contracts is 127, so it gives 127 x $18 x 100 ~ $230'000 profit. (Seems like the post on Twitter is missing x10 factor.)

deleted 3y ago

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