How many Options Contracts makes a Market move

Discussion in 'Options' started by Atikon, May 20, 2020.

  1. Atikon


    Just out of sheer Curiosity. Say in a market like SPX or WYNN. How many Contracts (Absolute/%of Volume) would I have to buy/drop to move the Market?

    What do Big Players do to avoid making their Moves obvious? Is it possible to hide a sale/buy if one wants to buy those contracts and sell them within the same day?

    Can an Order within the Options Market move the Price of the Underlying?
    .sigma likes this.
  2. destriero


    It's not as you think. Say you were to buy 20K SPX puts at market. The MMers would get neutral price immediately short 2*SPX deltas in ES futures as it would be impossible to trade the bear synthetic in SPX.

    Say you're buying 20K ATM puts. It would require the other side to short approx 20K ES futures. The MMers can afford to pressure the bid bc they would be up huge on their SPX edge.

    Nobody is going to go marketable on 20K puts in an orderly mkt, but it would result in MMers shorting aggressively which would cause the futures to sell off -> cash mkt selloff.
  3. never2old


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  4. destriero


    So huge orders in volatility impact the market not via direct pressure but through laying off the risk. Get flat in futures -> lay off the risk in vol/greeks as flow comes in and reduce their futures position.

    TBH it's not really much of a thing in listed mkts. It's more impactful in OTC trading.
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  5. ajacobson


    As has been pointed out - assume the MMs and need to lay off the risk. So a 1000 50 delta puts in WYNN - first, look at visible size all exchanges and the figure out how much stock if any needs to bought. A good bank desk could choose to sweep the market and facilitate the rest themselves. Doesn't necessarily mean the MMs will buy the stock immediately. A good MM has a sense of stock availability and how much they may have to pay up or they'll simply quote the trade as "tied" to stock. It is not uncommon for the MM community to trade millions of shares a day for equity names they make markets in the options.
    It also depends on market conditions and time of the day. It can be much more expensive to hedge 3 minutes before the close than a few hours earlier.
    SPX and the entire S&P complex can be a bit easier as there are so many hedging. A bank desk can be 10,000s up to facilitate a customer.
    IMHO open interest which is a day old - says more about exiting than initiating a trade.
    Hedging can also occur by trading other things in the matrix. Customer want's to buy the $75 calls and may get some of the hedge by trading a resting market - already in the book.

    The simple answer - no OI and it's the beginning of a new option listing - put yourself in their shoes and your first reaction in equities will be to delta hedge. Not ideal, but generally the first reaction.
    One of the biggest MMs on the CBOE traded very little stock and just traded the equity names correlation to the 500 back when spreads were in fractions.
    Last edited: May 20, 2020
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  6. kmiklas


    Often market makers will hedge an options fill by covering a call or protecting a put. This buying and selling of the underlying can move the price.
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  7. gaussian


    Strike pinning is exactly this phenomenon. As a result of hedging for delta as gamma gets more intense with expiration approaching a heavily traded stock will tend to "pin" to the price of the most liquid contract at expiration.
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  8. Nighthawk


    Thus, the "maximum pain" theory.

    Maybe you will find useful.
    never2old and Atikon like this.
  9. Grantx


    What do you mean they can afford to pressure the bid because they are up huge on the spx edge?
  10. I have been trying to understand this concept ever since reading about the large institutional investors selling puts on SP500 in order to collect premiums and the MM's having to buy those positions from the institutional investors and then hedging that position in the ES futures market.

    I have also read stuff from Spotgamma and Charlie McElligott from Nomura talking about this subject although its difficult to understand and grasp. So basically MM will sell the options and collect the premium but then hedge in the futures market? Do you know what happens when the investors position is correct and starts heading ITM, do the MM have to buy more or short more futures? If you can answer thanks in advance.
    #10     May 22, 2020