Call buying frenzy (Thread)
Never ending call buying sounds like the virtuous cycle of equities. Bullish investors buy calls. Delta hedging banks who sell the calls buy equities to hedge, pushing up equities making the calls more valuable for their buyers, who buy more calls.
Never ending call buying sounds like the virtuous cycle of equities. Bullish investors buy calls. Delta hedging banks who sell the calls buy equities to hedge, pushing up equities making the calls more valuable for their buyers, who buy more calls.
https://twitter.com/sentimentrader/status/1350457253250396161
Sounds perfect, till the securities get delivered. If the investors were just looking for a quick profit, they sell the stock, putting pressure on the now inflated market. To which people say what if the call is cash settled. It makes no difference.
In a cash settled option, the selling bank which was delta hedging its position is left long the hedge on expiration, and you can bet your bottom dollar, the bank has no interest in the hedge after the option expires and will dump their position going into expiry.
Bottom line: the greater the call buying frenzy, the greater the post expiry hangover. I’m not making a market call, simply explaining the facts of options trading.
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