What does “gamma” mean in this context?
From the equation, you can derive a series of rates of change one one variable with respect to another, often colloquially known as "the greeks", since they're all denoted with greek letters.
The first one to know is delta. It's the rate of change in the option's price with respect to the underlying asset's price.
Delta generally follows a curve, not a straight line. Gamma is the rate at which delta changes with respect to the underlying asset's price.
The reason why these are a big deal are because options traders often try to remain "delta-neutral" - they want the overall delta of their options portfolio to remain close to zero, which limits the effect of fluctuations in the underlying asset's price on the overall value of their portfolio. But that's a constant balancing act, because changes in the underlying asset price also change the delta of their position. A low gamma means that it changes slowly, and it's easy to keep things balanced. A high gamma means that they're sitting on an unstable equilibrium, and they're going to have to buy and sell more aggressively in order to maintain their position.
Your description is right(-ish) for directional traders.
1. Buy underlying shares.
2. Buy calls on those shares.
3. Market makers who sell you those calls have to buy shares in the underlying stock to hedge (they run balanced books)
4. Demand for stock rises, stock price and calls increase in value
5. Use proceeds to buy more stock and options. Rinse, repeat.
There's a potential for some seriously crazy non-linear feedback.
If your argument is abuse will happen anyways - why even bother having any financial laws?
If I buy 10 calls, the MM has to hedge. If SoftBank buys 100,000 calls, they just hedge more. How do you figure this is in any way remotely illegal?
Buying shares also raises the price of shares, should that be illegal too?
Essentially: most people intuitively think the stock market should be more heavily regulated than it actually is.
"investor simultaneously sells and buys the same financial instruments to create misleading, artificial activity"
There's a bunch of examples here;
https://en.wikipedia.org/wiki/Market_manipulation
The US Securities Exchange Act defines market manipulation as "transactions which create an artificial price or maintain an artificial price for a tradable security".
Well, I do.
Buying and holding call options is not market manipulation, full stop. Please provide an example of someone being penalized by the SEC for buying and holding call options without using insider information. You won’t, because buying call options is not market manipulation.
Is it market manipulation when Buffett announces BH bought shares of a company and then the shares skyrocket?
I never claimed someone was ever penalized by the SEC for buying and holding call options, just that buying derivatives can be a crime if it's done for the purpose of market manipulation.
That doesn’t change the fact that buying and holding options is not illegal...
http://jamaica-gleaner.com/article/business/20200821/scotiab...
Lots of things where once legal, which the majority of society came to deem as bad (slavery, child labor) - which we then came to make illegal.
But the problem here isn't just simply buying stocks, or holding options. It's the repeated process of buying both a stock and its options at the same time by a whale - and it seemingly does allow for manipulation of stock price. As so, why shouldn't such a pattern of activity be made illegal?
Not sure how this statement helps your argument. The same happens in pump and dumps. The people who artificially manipulated the price up in the first place sell in large, duping the latecomers out of their money, and the price corrects.
>Buying equities and options in large amounts is not market manipulation.
No it is not, but this isn't a simple matter of buying of equities and options. It's a pattern of repeatedly buying equities and options by one large party in a way which allows for potential manipulation. As so, even if such a pattern isn't illegal now, why shouldn't such a pattern be made illegal? Wash trades used to be legal before 1936, but we made them illegal for similar reasons...
Please explain how SoftBank was potentially manipulating markets illegally by buying shares and calls, I’m curious.
https://news.ycombinator.com/item?id=24376279
https://news.ycombinator.com/item?id=24376243
Now please explain why this activity shouldn't be made illegal, when wash trading is deemed illegal. Wash trading after all, involves buying stocks... yet it's illegal.
Wash trading is a way of buying/selling stock, (namely by one party at the same time), which can be abused to manipulate prices. Just like what is happening here is a way of buying stock and its options (namely by one party at the same time, repeatedly), which can be abused to manipulate prices.
Some patterns are illegal by the way. However proof is still quite difficult to come by.
For instance, it's market manipulation to place large orders continuously and then cancel those orders continuously.
It's also market manipulation to place both LARGE buy and SELL orders at the same time in order to fake volume for a particular stock.
However me as an individual or private entity can at any time go place an a LARGE as fuck order for what ever I want.
In fact if you look back and study old stock floors ect. traders started to learn what the people at the large banks/intuitions looked like. When they saw them walk up with their stack of PHYSICAL orders, they'd try and step in front of them because they knew the market was about to move as a large order was about to be placed.
No it doesn't.
Shares prices are falling today. People are selling. That means people are also buying. Every transaction has a buyer and a seller. Yet prices still fall.
Given low enough liquidity even tiny volume purchases relative to the liquidity can increase the price of a share.
Good question.
On one hand, it's purely mechanical; it just works that way. On the other, it's hard to imagine doing it deliberately wouldn't be considered manipulation.
I’m not saying it’s illegal per se, but financial misdeeds don’t tend to get punished in the US, unless the victims are wealthy enough. See, for instance, the global financial crisis of 2008 vs Bernie Madoff.
In the purest sense, sure.
I bet there will be more to this story, and I think if insiders or associated holding companies are found to be doing so, it's at least a grey area.
Can you leverage buying a lot of calls or puts into making profit for yourself?
How?
Now public companies could still restrict CEOs and other employees from profiting from insider knowledge. It could even be as simple as requiring employees to file disclosure filings before any stock transaction to level thevplayomg field.
http://m.koreatimes.co.kr/pages/article.amp.asp?newsIdx=7768...
Also, this works in reverse right? So Softbank is literally just creating a stock market bubble since the price rises are not built on anything fundamental?
If the stocks they're choosing have high gamma because there's a lot of short interest, then some of this increase could be shorts transferring equity to longs when they cover, which wouldn't be a bubble per say.
Historically low interest rates could also fuel this directly by providing extremely low interest capital and indirectly by pushing investors in general to chase yields in equities. That would be more bubble-like, but it also applies to other asset classes, and it's ultimately a function of central bank policy.
Gamma is the rate of change of delta w.r.t the underlying price. For example OTM calls have a delta close to 0. As the underlying price increases the delta will increase. When the underlying price reaches the call strike price (ATM) the delta will typically be 0.5. As the underlying price continues to rise and the call becomes deep ITM the delta will approach 1.0.
Gamma is how much the delta changes for a change in the underlying stock (i.e., the second derivative w.r.t. the stock price).
Market makers hedge their options positions by buying or selling the underlying stock so that they have no exposure to moves in the underlying stock (they are "delta neutral"). So if the delta at the current stock price is 0.50 and the market maker is short 100 call options, he will buy 50 shares. But options are non-linear and the delta changes with the stock price (again, this is what gamma is). If the stock moves up so that the delta increases to 0.60, the market maker will need to buy another 10 shares so that he owns 60 shares and is again delta neutral.
In this way, buying begets more buying and this is what people mean when they talk about a gamma "meltup".
If he does that he won't remain a market maker for long.
A single call option almost always is for 100 shares of the stock. So being short 100 call options, delta 0.5, would require being long 5000 shares to be hedged.
I'm sure you knew that, I'm just pointing out your typo for other less-experienced people here.
The first derivative “delta” is the speed at which the option price moves w.r.t the asset price. If the option is “deep in the money”, it’s almost 1 - any move is the asset price is essentially also the same move in the option price. If it’s deep out of the money, it is almost 0 - the probability of the option being worth anything is almost zero, so it’s value doesn’t change with price moves. It is 0.5 at the money (but i don’t have a one line intuitive explanation)
Gamma is the acceleration of option price with respect to the asset price. If the asset price grows, how will the delta (speed) change?
https://www.investopedia.com/trading/using-the-greeks-to-und...