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> If options & futures are more liquid than the underlying, someone will be tempted to nudge the underlying. This is a weird statement. Why would liquidity ma
by throwaway2037 1y ago
> If options & futures are more liquid than the underlying, someone will be tempted to nudge the underlying.
This is a weird statement. Why would liquidity matter here? As a point of reference there are generally two types of options: (1) options that depend directly upon the underlying, like a Tesla stock option, or (2) options that depend indirectly upon the underlying, like options on S&P 500 index futures. The liquidity in category 2 is normally tiny. Cat 1 normally has far less liquidity than the underlying.
Why is the adjective "more" important here? Even if less, the opportunity to profit is still good, assuming that one chooses the path of market manipulation.
- lmm 1y agoWhat matters is the volume rather than the liquidity per se, but the two are generally pretty well correlated. The point is that moving a market costs money, making a trade moves the market against that trade, so even if someone is deliberately trying to move a market they'll pay more than they could ever hope to recoup. The exception is when there's a derivative market that has more volume than the underlying - in that case profitable manipulation becomes possible, as you can spend to move the underlying, losing money, but making more money on the derivatives where you'd bought the other side.
- PartiallyTyped 1y agoHeavy gamma exposure also helps move the market by forcing dealers to hedge in some particular direction.
- toomuchtodo 1y agoDuring the memestock craze, retail traders were able to create a gamma squeeze due to this forced hedging. https://www.nasdaq.com/articles/what-gamma-squeeze-understand-gamestop-play https://www.nasdaq.com/articles/what-gamma-squeeze-understan...
- PartiallyTyped 1y agoAnd it was glorious! MMs sure learned though. Premiums have exploded now.
- throwaway2037 1y ago> What matters is the volume rather than the liquidity per se What is the difference between volume and liquidity for the purpose of this discussion? > The exception is when there's a derivative market that has more volume than the underlying This is wildly rare in public markets.
- lmm 1y ago> What is the difference between volume and liquidity for the purpose of this discussion? You're the one asking "Why would liquidity matter here?", you tell me. Like I said, they're correlated well enough that it doesn't really matter as far as I can see. > This is wildly rare in public markets. Yes, but it's what happened here.
- greyw 1y agoOption markets are quite often more liquid than the underlying in India which is why Janestreet was able to pull that off. Retail folks use options to gamble. Apps gamify access/trading. It's really odd like that.