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https://www.shrewdm.com/MB?pid=416428821

It occured to me recently that 'fake TA / MI signals', (relative to history pre-2022), may have been generated currently by record call options activity.

For example, what looks like 'lots of people buying in, broadly across the market' in the data, may actually be a small number of traders using ridiculous high levels of gearing to bet on the index with calls. With social networks and youtube/reddit crowd leaders having the effect of amplifying particular trades, too.

This matters, because market activity driven by delta-hedging of short-term, highly geared call options should get reversed if the calls are sold back to the MM or expire worthless, rather than the options being exercised/held as stock afterwards.

I have seen a LOT of young adults win and lose a LOT of money in recent months using options to gamble.

There are also social dynamics in social media to ensure people are actually placing the trades they claim to be placing: 'proof or ban!'.

I am seeing a LOT of gambling addiction / problem gambling behaviour nowadays where young adults are using options.

lux

That's interesting ..... the best guy to opine would be Jim.

But logically ....especially since you alluded to the fact that most of these Options are NEVER exercised .....

it really shouldn't impact the underlying should it? Because its a derivative to begin with. The QUOTE 'lots of people buying in, broadly across the market' ENDQUOTE if its based on really Index/ETF/Stocks volume - its actual buying - not Derivatives

What's more important is THEN THE OTHER SIDE - ie the people who are writing the calls.

Since Call Writing is marginally bearish - which means the so called "Smart Money" or institutional investors are selling a bit into the rally.

QUOTE : social dynamics in social media to ensure people are actually placing the trades they claim to be placing: 'proof or ban!'. ENDQUOTE

This is BANG ON - influence culture --- People are advertising such BETS - which obviously can influence people ie Retail buyers.

QUOTE: delta-hedging of short-term, highly geared call options should get reversed if the calls are sold back to the MM : ENDQUOTE

It actually really doesn't matter all that much to Delta-Hedgers - they have to re-balance continuously any case - So someone selling it back to them is ie the expected %age built into their strategy.

For them the net objective ( especially in a dividend paying portfolio etc) - is that whether they were able to protect the underlying ownership over the period while offsetting the cost of writing the options against any expected cash payouts from the portfolio. Its typically net negative - ie there's ALWAYS cost of hedging -- but if they expect the portfolio to say appreciate at 7-10% CAGR while they have promised their clients 5-6% they can allocate about 1% to the Hedging program

NET MSG:
Derivative volume doesnt' impact Underlying volume - at least Directly. Sentiment - different matter altogether.

Best

Ah also Taxes .... there's a clear trade-off here.

Deferring taxes has a positive impact - while the Hedging can be written off as an expense ( I think - I am not an accountant)

Dear anchak,

You wrote:

> Since Call Writing is marginally bearish - which means the so called "Smart Money" or institutional investors are selling a bit into the rally.

No.

1) Market makers generally seek to profit from bid-offer spread and arbitrage. They are not 'marginally bearish', they are aiming to be neutral w.r.t stock movement. The bearishness of a sold call is soon balanced by an appropriate small net long position in the stock (or by a combination of stock/put, or by buying a call).

2) As the market/stock rises, those market makers who have a net 'sold calls' position when viewing their aggregate position, must *buy* to cover their increased chance of a payout. Delta is increasing as price moves towards strike, therefore they must buy.

3) MM's who must remain price-neutral w.r.t. the calls they have sold, certainly do NOT 'sell into rallies', contrary to your beliefs. Very much the opposite and for obvious reasons.

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Seperately,

a) Please CAN you MAKE less use of CAPITALISED WORDS all OVER your POST. It will INCREASE the comprehensibility OF YOUR writing. Your POST was extremely UNCOMFORTABLE and difficult TO read.

b) For quotes, the "" syntax is commonly used in English. Please, don't use the words QUOTE ENDQUOTE. It's a moral crime against the English language and I am the QUOTE QUOTE POLICE UNQUOTE.

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> For them the net objective ( especially in a dividend paying portfolio etc) - is that whether they were able to protect the underlying ownership

I think you are confusing 'random people who sell calls as a way to make extra money or take a position' or 'random institutional managers aiming to increase return on the stocks they hold' as opposed to 'market makers'.

Random people and institutions may take a net long or net short position via calls or stock depending on their choices.

Market makers generally aim to remain neutral.

(Institutions and individuals, in aggregate, balance out net long, for fairly obvious reasons.)

lux

X-post: follow-up post to post 74 that I shared before, adding detail.

https://www.shrewdm.com/MB?pid=415842543

lux

HI lux..... I read your other post - Outstanding and cogent thought process :)

Btw ( :) ) - APOLOGIES ---- I generally use Caps to highlight text - because a lot of folks just go cursory glance. You seem to be in the minority.

I think I misunderstood your Counter party here - I primarily described Funds/IIs who actually own the stock to begin with and deploy Covered Call Writing as a potential Cash generation/Hedging strategy. This was always believed to be a common participant in the Options MM market.

What you describe is a very different animal.

(1) Because in Step 1 - it seems its a Naked Call Writing .... backed by Cash I am guessing. Nonetheless, the initial position has a ton open risk. Because buying the underlying stock simultaneously would likely invalidate the bid/ask spread - with no arbitrage theory of pricing - correct?
(2) The rest of the steps you outlined would follow - in this scenario.

So the key question in my mind - is how big is this market ie is this a dominant strategy these days?

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