It's not, at all. Why consider the risk of a single-option within a position, unless that position is (a single option)? You take spread/combo risks along with D1 as a whole. I can short a straddle and undertake URO on the upside. I can buy cheap wings at greater than 1:1 and make the outlier a home-run. Would I concern myself with the in situ risk of a single strike within the portfolio? I could not even if I wanted to (skew/contamination) in terms of risk-profile, as static risk doesn't exist. You're stating (obliquely) that not all risks can be known. The "unknown/able" risks are not the result of zero-sum. Zero sum is strictly defined by the fact that OI in listed options sums to zero (excluding transactions costs). It's been explained to you, repeatedly. And shares are not warrants as they have no convexity (linear/D=100).
dp can you give a hypothetical scenario of how this would have been hedged? Seems to risky for it to be shorted naked at that size
Stardust9182 - no offence taken. I rarely get offended, and yes agree its an interesting discussion. One thing I have learnt about a lot of these forums is that just because I/we/you may have a knowledge of something there is a lot of assumptions that others have a similar or at least partial knowledge as well. Hence the speaking Chinese while hearing Spanish. There is also different ways of looking at things, different cultures, experiences etc. (mind you some trolls are simply tools ) I would define Delta hedging as a subset of offsetting. Offsetting is simply like reinsurance and spreading the risk. Delta hedging is one way to do it, from the perspective of a MM. Key here is that if you have only ever trade single option strikes or strategies on one stock or instrument, you then have a different perspective to someone who may have traded a book in an instrument with multiple strikes and series, or even portfolio of options. The perspectives change and the focus changes. ................. As for how someone may have hedged..... example: (I dont know the specifics but will make up numbers) Trader A sells Vix calls at 22 to Mktmakers (MM) for $1, the MM thinks they are theoretically worth** $1.10. They might hedge by selling the underlying, underlying drops, they lose $1 on the options, and make $2 as the vix falls or by buying and selling it, AND/OR also selling other options at different strikes or series at higher prices to their theoretical prices. Its a volume game.To them it might just be another trade in a series of trades. (**Simply put: As a MM I viewed theoretical fair value is mainly only relative to other options at that point in time. Change the parameters or the supply and demand, the fair value probably changes, and over the long term, it should even itself out, but in the mean time there is a spread/edge to be made and its best done with similar objects if possible) ...or think about it this way. The seller provided the MM with ammunition to be able to sell premium at other strikes and series to other people who wanted insurance. Thus they make money twice (theoretically)...,,,and if you keep doing this and somehow manage a balanced book then you fullfill your role as a MM - providing liquidity for those who wish to transfer risk. To the Vix call seller, they might have been long options in multiple underlyings or the S&P. If there is an explosion of vix vol (volatility) one would assume it comes from individual vols going up..... or they might be short the S&P, thinking that if it falls they make money here, lose in the Vix, but if the S&P sits still or rises slowly then selling the Vix makes money. They might have been hedging against being long vol in other overseas markets. They might have had other OTC option trades on. These days with quant models what they are who knows! .............. As I like to give live examples of real trades when I can. TNT takeover Australia 1996. (Controvesial case as Simon Hannes was charged with insider trading. He allegedly bought calls and made money with an OTM 3 week till expiry opening purchase. )The MMs who sold them spread these against other calls, so while they might have lost on those individual calls, they made on their other call strikes as trading volumes went up, they also bought spreads with edges and if trading long gamma made money on the take over too. (unless they had too much long dated vol on), all without necessarily having directional bets on. (Interestingly enough as I understand it the money was returned to the MMs from the alleged insider trading calls sold as no one claimed the money! It would have been an admission of guilt) ......... apologies for the long post.
Why should we not expect that all ITM calls were automatically exercised by the Australian equivalent of the OCC?
OCC - Orange county choppers? This has nothing to do with exercises. They were probably exercised/converted to shares by the broker with the account, and then sold in the takeover, but in this case the money in the account was never claimed. Part of the allegations and not being able to prove whose account its was. Thats one of the reasons the case was interesting. There was even a Mr X. involved! This money was then returned (as I understand it) to the original sellers of the options. Not sure how the calculations were made.
This sounds like something Atticus would write. Is that you? You seem to miss what I say entirely. I am not talking about risk for a single position, nor Open interest, nor convexity. I never talked about risk of the position at all but that options buy and sell risk - an entirely different thing. I am sorry you are unable to understand what I write.
You're attempting to come off as knowledgeable but all I hear is "derp" .... You could've stated, "options are risk" but instead appear to be impaired. Yeah, I am atticus, do I know you?
I agree with your comment on the seller. He likely took a bet (LOL unless he worked for Gentle Ben or Janet) . MMs don't bet like the seller, which is what you impled in your example. There we agree. So our differences come from a couple of things. You describe one particular hedge trade. Then you say "delta-hedging on daily basis". I think that is where the losses/gains are hidden. Who ever was on the other side of the MM's future delta-hedging market trades took the risk and gained and lost money on a daily basis. I think zero sum still applies since all money involved in all the trades would still add to zero. Assuming there was no need to delta-hedge in the future at all on close of the first transaction you describe - that is both markets froze in place as is until time expired and neither trader made anymore trades again - then either the MM or the initiator would have to lose money in the exact ratio on the final day as the implied became realized volatility at expiration. So mixing in legs, different markets, different methods doesn't change the fact that options are zero-sum (less commissions). Aren't they? If they aren't then how can the market maker get two different results without putting in some of his money or taking out someone else's money in a mark to market futures system? Out of curiousity, why do you choose a delta-hedge on a daily basis? Why not monthly, weekly, hourly or something else? Or was that just for clarification with a concrete example? My contention (from the start) was that MM's don't trade this way when a large trade hits their screen. I will explain my reasoning below but our discussion is on a different concept. Thanks for explaining your comment further so I can understand.
Interesting post so be as long as you like. Please post more and question me all you like. LOL - If I am wrong then tell me so I can learn and if I am right then tell me so someone else can learn. There are not too many tools on this board but I have often wondered if people are such good traders, why do they feel the need to slam others? Your comment about not getting offended is the sign of a humble man (the best traders I know are humble). That would tell me that you are likely a real trader. If a few words typed cause someone to go off the deep end, it is just a matter of time before it happens in a trade and a lot more pain is felt. I have trouble believing that the slammers can be much of any kind of real trader.