It seems more and more people are trading options instead of the underlying. Some might even have open interests with notional underlying stocks probably equal to or higher than the total float of the stock in some cases. So my understanding is when speculators buy options (long puts or calls) market makers that sell the position, often take a delta neutral position. So for a speculator who buys puts, the market maker who sold the put has to short the stock. My question is whether delta neutral dynamic hedging is market moving? Clearly it is. But is it essentially self fulfilling? What I mean is, before options markets, in the equities market based on supply and demand, when you buy, you help push the price higher, and when you sell, the supply pushes price lower. But what about effect of options? If someone buys a tonne of puts, does that essentially have the same effect on the underlying as someone selling a bunch of stock in the equity market, meaning that a speculator's long put position can create self-fulfilling downside for the underlying? Well, market makers do have to short stock to stay hedged. So there is that as far as natural sellers as a consequence of long put option activity. So are options positions basically self fulfilling? I understand there are trend followers too, who look at "unusual options activity" and relate that to "smart money" and they follow in and help make a price over shoot in either direction. Maybe market makers who see large open interest positions around certain strikes will move prices there too over time to weed out their own 'adverse selection' in case those speculators long of options were "smart money" with insider information.
If there is more delta being traded than is available on the bid (or offer), then yes, it can move the underlying market. In the case of option buyers, the effect of convexity on the hedging MM's have to do against their shorts can exacerbate large moves.