Also, you have to decide: do you think this was a stupid (retail) investor or a smart (institutional) one? If stupid, how do they have a few million dollars to blow on a bet like this? If smart, might they have some plan, like they think they can trigger a squeeze of some kind? This all just raises so many questions for me.
> To be clear, market makers are not required to do what the model tells them, and the “common sense” answer is perhaps ambiguous. Arguably the fact that someone bought thousands of these options means that the probability of them paying off is a bit higher than the model suggests. If you are selling way-way-way-out-of-the-money options, you probably should not be blindly following your model. Here is a story I likefrom Nassim Nicholas Taleb.
> also though all notions of money and value and human society will be rendered meaningless, so I don’t know what you’ll do with your payout.
Just imagine this discussion one month ago - ha ha, there is no way in hell GameStop will trade in 4 days at 500 when now it's 20.
Of course, if you only care about this years bonuses, ....
> To be clear, market makers are not required to do what the model tells them, and the “common sense” answer is perhaps ambiguous. Arguably the fact that someone bought thousands of these options means that the probability of them paying off is a bit higher than the model suggests. If you are selling way-way-way-out-of-the-money options, you probably should not be blindly following your model. Here is a story [https://twitter.com/matt_levine/status/555913245589250048] I like from Nassim Nicholas Taleb.
> Fun fact, the Bloomberg options value calculator tells me that the delta of that $800-strike call option expiring tomorrow is zero. That is, the right theoretical hedge for a market maker who sells that option is to do nothing, to buy zero shares to hedge against the minuscule risk of the stock going to $800. Standard options math, and also frankly common sense, tells you that if the stock is trading at $40 or $90 or whatever, and someone comes to you and asks to buy a two-day option struck at $800, the proper reaction is to say “lol okay sure pal,” take their money and never think about it again. But I’m sure people bought other options that market makers did hedge, why not. We’ve discussed some recent research finding that options positioning predicts late-in-the-day trading moves, and I suppose the shape of yesterday’s late-afternoon rally could be partially explained by options.
I hope if anything, this Gamestop saga has turned a lot of people onto Matt Levine's writing. He consistently puts out some of the most laugh-out-loud hilarious things I will read every day, in a way that is actually able to concisely explain really complex subjects. And he cranks out one of these every single day. I am simply in awe of him.