I don't quite get how the market responds to option trading. So Softbank is buying a bunch of call options. Why is that pushing the market up? Is it just magnifying momentum because they exercise calls when prices go up and that in turn makes prices go up more? And then the opposite happens when it goes down?
We're having a big pullback on tech. Is it all or mostly attributed to this one company? If so, that's scary. [Reply]
Originally Posted by Rain Man:
I don't quite get how the market responds to option trading. So Softbank is buying a bunch of call options. Why is that pushing the market up? Is it just magnifying momentum because they exercise calls when prices go up and that in turn makes prices go up more? And then the opposite happens when it goes down?
We're having a big pullback on tech. Is it all or mostly attributed to this one company? If so, that's scary.
I imagine the entities selling them a ton of calls are hedging the bet by purchasing a lot of shares. That's probably pushing prices up. I doubt it's the only thing. A lot of new traders/investors are pushing money in too. There are always traders riding momentum too. It got going and went a ways too far. [Reply]
Originally Posted by Rain Man:
I wonder if we're in line for a big correction. It's completely "me-search" instead of research, but I've recently heard several independent bits of bad news in my personal network, to the point where I've wondered if some sort of tipping point has been reached in terms of companies holding the line on the economy.
The Dow went up almost 3k in August so a pullback was definitely warranted. What’s interesting was this same thing happened in May. May 1st to the 1st week of June the Dow went up a similar path then stabilized and then came back in August.
Originally Posted by Rain Man:
I don't quite get how the market responds to option trading. So Softbank is buying a bunch of call options. Why is that pushing the market up? Is it just magnifying momentum because they exercise calls when prices go up and that in turn makes prices go up more? And then the opposite happens when it goes down?
We're having a big pullback on tech. Is it all or mostly attributed to this one company? If so, that's scary.
Sure. So Softbank buys such a large amount of calls and they do so from market makers. Market makers can hedge by buying the calls back, but that's not possible given the volume they're selling. These single stock calls just aren't liquid enough. So, they buy the underlying stock back as a hedge. But the delta of a call option increases as it goes into the money. So if Softbank bought 10 AAPL 50-delta calls, the market maker would have to buy 5 shares of AAPL to start. If AAPL goes up some amount, the delta might increase to 60 and then the market maker would have to buy 1 more share. That pushes the price up and increases the delta further to 70. Then he has to buy another share. Etc. On the way down, it's the exact same impact but the other way.
Anyway, take that to an extreme where market makers are short a lot of calls (i.e., something called 'gamma' which is the amount the delta changes as the underlying stock moves) and the market is going parabolic. It's made worse because of the Robinhood crowd who's been chasing returns left and right.
My email to customersupport@softbank.com must have worked. It seems they went back to buying calls as everything has turned around and shot back up. [Reply]
Originally Posted by ChiliConCarnage:
My email to customersupport@softbank.com must have worked. It seems they went back to buying calls as everything has turned around and shot back up.
Next time give us a heads up before you kill the dip. [Reply]
Originally Posted by Hog's Gone Fishin:
If you try waiting for a bottom you always miss the bottom.
I think Amazon is a great investment especially now because I imagine sooner or later they will do a stock split and when that gets announced its going to fly 50%
Amazon is a good buy because this Plandemic wrecked all their competition. There's no more small business to worry about. It's clear sailing to a Monopoly.
And if you like Amazon, check out BABA stock. It's Chinese Amazon but with 1.5 Billion customers. [Reply]