Options Market Color: Thomas Peterffy

Discussion in 'Journals' started by Humble Investor, Feb 5, 2018.

  1. I sent the below to a friend in December.

    Dear XXXXX:

    It was a real pleasure to see you last night.

    Thinking about your strategy of selling 3000 calls and 2000 puts. You said there were 4 reasons it could go wrong, none very likely. I agree but even if one of them starts going wrong a little bit, the market could run away for the following technical reason.

    This has been a very successful strategy for the past several years. Many people know that and more and more people do it. Do you know who is buying these options, losing what you are making? It is not retail traders hoping for a long shot. It is professional traders who run a hedged book. They buy the options calculate their delta and hedge the delta with Spyders and high cap stocks. They post bids and offers slightly under and slightly over the market, selling on upticks and buying on downticks, making a trading profit. They pay very low commissions (IBKR is charging 10cents per 100 shares to high volume traders) plus they receive 23 cents per 100 shares from the exchange for posting limit orders. (IBKR passes this rebate back to the customer).

    As the market rises they get longer due to the increasing long delta from the call position and decreasing short delta from the put position, so they will keep on selling stock into the upticks to remain hedged. Similarly, in a down market they'll be buying. Buying downticks, selling upticks, they will eventually earn enough to pay for the options they bought and some.

    Everybody is happy! What can go wrong?

    As the market approaches one of the strikes, the option premium will begin to grow and the option seller will have to ante up more and more money to keep his position properly margined. Some sellers will run out of money and will have to repurchase those options or their brokers will do it for them. This will push the market further in that direction, causing additional option sellers to run for cover. The VIX begins running up.

    The traders who bought those options have them hedged. They will sell them only if they can liquidate the stock position and get a high enough price for the options to pay for whatever losses they have locked in the stock position (assuming an up market, they generated a profit trading the stocks back and forth but as they kept selling stocks on upticks they have a locked in loss in the short stock position).

    Hopefully this unwinds peacefully, but the more conversations I have along these lines the more I come to doubt that. This is the reason Goldman asked you to move the account. IBKR charges a so called "Exposure fee" daily to discourage large short option positions. If you choose to continue with this strategy and Merrill lets you do it at a dollar a contract, you have a good deal.

    Thank you for dinner, it was great fun. Thomas

    MoreLeverage, beerntrading and zdreg like this.
  2. zdreg


    that is the wisdom of Petterfy who is a billionaire X times
  3. JackRab


    Hmm... not entirely correct though. If you'd be long the 2000/3000 strangle you wouldn't be very actively hedging those delta's, since that would be a losing trade going up slowly.

    Downwards though... works like a charm
  4. So the guy, he send the letter to, probably got wiped out on Monday