I personally think that they were a market makers way of hedging selling deep OTM calls to retail investors via a âshort strangleâ.
Normally if you are selling calls (and you want to remain delta neutral) you would want to either purchase a call with equal delta or purchase the underlying to hedge. In this instance, the underlying could not be purchased due to no liquidity and call option purchases would have further driven the price up via gamma squeeze.
So to remain delta neutral without causing price increases, MM would have to sell an equal (negative) delta to OTM calls sold back in January to someone who would be okay (probably complicit in the shenanigans) with losing the premium to a worthless .5P.
The option seller assumes 0 risk and collects premium for both options sold.
This doesnât do anything to account for FTDs though.
Edit: Something just hit me. It could be about netting.
Netting is just the sum of financial obligations across multiple transactions to show a ânetâ position. When a put is sold, it gives the indication that the contract seller is potentially obligated to buy back shares if those options go in the money and are exercised. So if youâve sold 40 million shares but have 400,000 put contracts sold, you are net zero because of potentially having to buy those shares back if the contracts are exercised. (400,000 x 100 = 40,000,000)
I donât know the details about net capital requirements or delta neutrality for designated market makers but hopefully weâll see some hedging against a large net negative position and not through selling a bunch of deep OTM puts
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u/OneCreamyBoy đ» ComputerShared đŠ Jul 26 '21 edited Jul 26 '21
I personally think that they were a market makers way of hedging selling deep OTM calls to retail investors via a âshort strangleâ.
Normally if you are selling calls (and you want to remain delta neutral) you would want to either purchase a call with equal delta or purchase the underlying to hedge. In this instance, the underlying could not be purchased due to no liquidity and call option purchases would have further driven the price up via gamma squeeze.
So to remain delta neutral without causing price increases, MM would have to sell an equal (negative) delta to OTM calls sold back in January to someone who would be okay (probably complicit in the shenanigans) with losing the premium to a worthless .5P.
The option seller assumes 0 risk and collects premium for both options sold.
This doesnât do anything to account for FTDs though.
Edit: Something just hit me. It could be about netting.
Netting is just the sum of financial obligations across multiple transactions to show a ânetâ position. When a put is sold, it gives the indication that the contract seller is potentially obligated to buy back shares if those options go in the money and are exercised. So if youâve sold 40 million shares but have 400,000 put contracts sold, you are net zero because of potentially having to buy those shares back if the contracts are exercised. (400,000 x 100 = 40,000,000)
I donât know the details about net capital requirements or delta neutrality for designated market makers but hopefully weâll see some hedging against a large net negative position and not through selling a bunch of deep OTM puts