People buy far out-of-the-money calls all the time, they're actually overvalued compared to fair returns. Setting the strike price that high just makes the option more and more of a lotto ticket: the vast majority of the time it's just going to expire worthless, but that small chance of being "in the money" when the option expires is your jackpot. A fitting choice for that whole WSB attitude.
In other words, demand for volatility via buying options can actually beget volatility in the movement of the stock price.
In plain English: Options are basically a contract, with a time limit, that states the holder can buy a certain amount of stock at a certain price. "Options dealers" are the people who wrote the contract and sold it to another party. They are on the "hook" for fulfilling the terms, if the buying party wishes to "exercise" an option and buy their promised stock at the promised price.
Options dealers are automatically "short" all of the contracts they sell, because that's literally the definition of "shorting" -- selling something you don't own. Options dealers technically do not own the stock they're promising to sell to the buyer, but will have to once the buyer "exercises" the options contract.
Delta is basically the difference in velocity of the price of the options contract vs. the price of the stock it's representing. So, if the option is selling for $10, and has a delta of 1 (100%), then a $5 increase in the stock price will increase the option contracts price by $5 to $15. If the delta is 0 (0%), the price of the contract will not change.
Actually, I was wrong. The GP was correct to use the vocabulary he did -- because what I wrote isn't even the full explanation I was planning. However, three paragraphs in, I realized it would take much more to completely explain it.
Basically, options dealers hedge by buying the stock they issue options contracts for, and this can cause the price to move up.
Because they used standard, well-defined terms from that particular field? "Gamma" is further from mumbo-jumbo than 90% of computer programming vocabulary - it has a clear definition and everyone in the field understands exactly the same thing by it.
Options dealers don't necessarily sell options. They can also buy them. And "writing" an option means to sell it, so "wrote the contract and sold it" is redundant.
Options dealers are not automatically short all of the contracts that they sell. They may already have a long position in that option contract, in which case their sale is a closing sale. Also, I think you may be a bit confused...a short sale of options is not determined based on one's position in the underlying; you can be short an option and long the stock at the same time (for example, an overwrite is a sale of upside calls by someone who is already long the stock).
Delta is the first-order change of the option contract value, with respect to a unit change in the underlying price. I wouldn't refer to it at "velocity" because while I understand what you are intending to communicate (it is a rate), there is another options Greek called "speed," which is the change in gamma with respect to the underlying price. Wikipedia has a really nice description of the various options Greeks. For the truly curious, Sheldon Natenberg wrote a nice book called "Options Volatility and Pricing" that explains the Greeks better than I or Wikipedia can.
Options dealers who are short gamma will hedge by buying stock as it goes up, and selling stock as it goes down. Their demand for (or supply of) the underlying stock will impact the underlying price in a way that pushes the price in whatever direction it has already started to move.
In defense of my word choice: theory and practice are not mutually exclusive. If you want to be excellent at something, you should aim to learn both. BTW I have never taken an academic course on options or finance.
The best traders in the world are worth billions? So the above translates to "I am a billionaire". Seems unlikely!
Whether that merits the title, on the other hand...
> totalzero: i am the best.
You know, that's totally fine with me. It's good to have those people around. As I learn more I'll be able to decide for myself what I think of that perspective. Your side is great too.
https://www.bloomberg.com/opinion/articles/2020-02-26/reddit...
The trading system and its operators deserve whatever fate results from such a decision.
If your bots do "stupid things".
Is that another way of saying that retail traders buy on the offer and sell on the bid while HFTs buy on the bid and sell on the offer?
This is market making which is the bread and butter of HFTs. This is the one thing they do which helps, not hurts, human traders.
They can do thousands of trades in the time it takes your nervous system to react and click the mouse. They parse a news headline many seconds before it ever shows up on the internet. They rent satellites to count how many trucks leave factories. They have access to person-to-person dark pool trades that never show up on the normal exchanges.
Algorithmic trading is a secretive black box, but who knows. These are just my speculations from hearsay and random research. If they can make a fraction of a cent from messing with you, they will. It can scale up infinitely. It's just software--there's no marginal cost to do so, provided they are properly hedged.
> This is the one thing they do which helps, not hurts, human traders.
Providing liquidity is their job, and it benefits the market as a whole. If market making by HFTs is a good thing, it’s difficult to malign those same firms for, well, making markets.
> They rent satellites to count how many trucks leave factories.
This isn’t their business model in the slightest. Quant funds certainly do this, but HFTs look for alpha in market microstructure.
> They have access to person-to-person dark pool trades that never show up on the normal exchanges.
Institutional investors can use dark pools to minimize market impact when trade large blocks. HFTs don’t benefit from having limited information on these flows.
> Algorithmic trading is a secretive black box
Algorithmic trading != HFT in the same manner that a rectangle is not a square.
> It can scale up infinitely.
HFT strategies don’t scale. ‘Scalable’ strategies support a large amount of capital. HFTs run high sharpe, low capacity strategies.
Either way, those hft firms definitely like retail order flow data. My guess is they're easier to "pick nickels in front of steamroller" kinda trades than institutional money which may cause extended one way moves that hits high frequency balanced traders adversely.
I'm also entirely talking out of my ass in the last paragraph. I don't actually know that any of what I said is true. Just speculation.
The order flow data is worthless (because the orders come from uninformed traders) the value is in filling them without the risk of being shortchanged (because the orders come from uninformed traders).
2) even if that were not true, hft works on volumes. So I contradict my previous speculative comment by saying this but volumes of institutional flows absolutely dwarves retail flows. You'd have much more opportunities trading around institutional money than retail money.
So if you've got a company and the city in which it's headquartered just gets a strong buy signal, sure that could be random but I'd imagine ...
Surely having the meta-data on who is trading and linking that to trades is the primary benefit?
(This is what happens when a society stops reading books.)
Specifically an eggcorn involves an erroneous analysis, in the name example a person figures an acorn does look rather like an egg and so maybe that's why the name for it is "eggcorn". Likewise "tow the line" mistakes the metaphor as involving pulling a rope rather than standing against a chalk mark ("toe the line") and "free reign" assumes it's about some analogy to absolute power of kings rather than controlling horses.
Reading this whole thread is nerve-wracking and puts me through the ringer.
All modern web browsers have a debug mode that allows you to easily edit HTML.
Not an expert but I'd be surprised if one trade like that triggered anything, could easily be a hedge.
Regardless, option trading tends to have human traders behind the wheel, and they're trained to figure out what's going on (trading options is similar to playing poker).
Market makers are sensitive to wing trades, precisely because pricing skew is more of an art than a science. Trading away from spot can have a substantial impact on the way the implied volatility surface looks. And this can affect trades of other maturities and strikes.
Trading options, for me, is nothing like playing poker. Poker doesn't have an underlying storyline the way companies do. Nor are there catalyst dates in poker.
In that sense it's similar to poker; you don't have all the information to analyze what other players do. In this particular case, is it an informed trader or a noise trader?
https://www.bloomberg.com/amp/opinion/articles/2020-02-20/mo...
Worth a read. Short version is that a lot of the ways people lose money are hard to just do the inverse of.
Those are considered illegal in US. CFD and like skirt the law here.
The big problem with bucket shops is that they tend to not honor the bets once you start winning too much as Jesse Livermore found out in late 1890s.
Still common today with all the fake forex exchanges. The rare winners have trouble getting money out.
Turn off adblock and go to finance and forex oriented sites. You will see many ads for them at least in Europe.
A common marketing strategy for them is to offer heavy affiliate comissions and this leads to make-money-with-forex type of affiliate sites. That's another sign.
Bigger ones would be someone like Saxo Bank which started as a bucket shop in 90s and now is medium sized and somewhat legitimate now.
Another sign to be aware is the use of Metatrader software. Up to version 5 now.
I am sure there are turnkey solutions offering a whole bucket-shop as a service.
Even if there are honest bucket-shops you are still betting against the house not against other players in the market. Might as well bet on horses or sports then.
EDIT: nice discussion here on situation in UK: https://www.elitetrader.com/et/threads/is-there-an-actual-ma...
A bet between trader & brokerage that the price will move a particular direction, with no actual trading or stock ownership occurring
https://www.investopedia.com/articles/stocks/09/trade-a-cfd....
EDIT: It occurs to me this may not be quite what you meant after all, but I think the end result is fairly similar
Their biggest losers are probably making essentially random bets in such a stupid way that they lose all their money.
It's still at $780, so whether they were the effect or not it's held some permanence.
Unlikely. Automatic trading systems will not see their trades. Most (if not all) of WSB trades are done through the Robinhood app. Robinhood users are not charged transaction fees executing their trades, they can do this because they sell their flow (these orders) to HFT firms. HFT firms are willing to pay for Robinhood's flow (trades) because the average user is not an insider, has no idea what he's doing and is most likely gambling. If you're an HFT you'd rather trade with a common person, then an informed investor because maybe they know something you don't.
Doesn't this make it more likely, rather than less likely, that HFT algos are affected by WSB madness?
Someone's just bought a $1000 call option on a stock that's currently $400? Automated trading systems will probably raise alerts on that stock since someone must know something for that to happen.
This appeared to happen when WSB were meme-ing on TSLA and a whole bunch of them bought $1000 call options when it was $400. Shortly afterwards TSLA skyrocketed in value.