Can you just paraphrase your point so I don't have to click on the potentially malware infested link?
The only reason option traders are pushing meme stocks into the stratosphere is that they want / hope / wish / desire yearn to earn tons and tons of $$$$$.
The real reason options are pushing meme stocks into the stratosphere JOHN DETRIXHE AUGUST 09, 2021 Vlad Tenev, CEO and co-founder Robinhood Markets, Inc., is displayed on a screen during his company’s IPO at the Nasdaq Market site in Times Square in New York City, U.S., July 29, 2021. We are only just beginning to understand the ramifications of the retail trading boom. Take Robinhood, which had a lackluster debut. Its shares dropped 8% on their first day of public trading. But on Aug. 4, just a few days after the IPO, options contracts linked to the company’s stock became available, and the shares took off like a rocket. As many have speculated, the options did play a role in the roller coaster rally that followed—but probably not for the reason some traders think, especially if they haven’t accounted for changes in how trading firms hedge meme stocks. Options, or contracts to buy or sell a particular stock if it changes hands at a certain price, have become wildly popular with the retail investors, including Robinhood customers, because they offer a cheap way to bet on stock prices. Conventional wisdom is that the mere availability of these derivatives linked to Robinhood’s stock gave the shares a boost thanks to market makers, or companies that post bids and offers for stocks and derivatives (they’re the intermediaries most investors trade with). The thinking is that market makers in call options for Robinhood stock (a bet that the equity will increase in price) will also buy the company’s stock as a hedge, driving up the share price. This type of trade, known as delta hedging, neutralizes the risk of price fluctuations for the market maker. But that’s not what happens these days in highly erratic meme stocks, according to two options experts interviewed by Quartz. When it comes to meme stocks—powered by online sentiment on platforms like Reddit or Twitter and exemplified by GameStop and AMC Entertainment—market makers using this form of hedging can get burned, the options experts said. That’s because these stocks have broken down the typical relationship between options and the underlying stock. Part of an option’s price is calculated based on its implied volatility, or a trader’s guess as to the likelihood that a stock’s value will change. When a stock price goes up, its implied volatility typically goes down. This makes a rough sort of sense—if a stock is going up, in theory it’s because investors have more certainty about its future cashflows and profits. Meme stocks flip this around: The equity may shoot up in price, but it’s reasonable to expect that this price increase is highly unstable. During a trading battle between retail investors and hedge funds, shares of GameStop skyrocketed in January to more than $300 from about $30 a few weeks earlier. It was reasonable to expect that the record high stock price might come crashing down. (Or it could shoot up even higher—there was little or no way to guess what the price would do.) The implied volatility arguably got more unstable as the price went up. As one of the options experts we spoke with explained, this places market makers in a dangerous position: Imagine a market maker has sold a put on Tesla shares (a bet that the stock will decline in price) and likewise placed a short sale (a bet on the shares to decline) on actual Tesla shares to offset, or hedge, that position. If the shares jump in price, the market maker will lose money on the stock’s short sale. Ordinarily, the options price might be expected to compensate. But if the meme phenomenon is taking place, the put option may, for example, stay at a steady price. Because of the implied volatility input in the option price, the neutralizing hedge has broken down and the trader can lose money. For call options, the situation is basically reversed. To put things more simply, when it comes to meme stocks, the shares can’t be counted on to offset the gains or the losses on an option. This type of breakdown has happened in several stocks, including AMC, BlackBerry, Tesla, and GameStop. Market makers know this and have adjusted accordingly. “Meme stocks are completely idiosyncratic—there is no natural hedge,” said Steve Sosnick, chief strategist at Interactive Brokers. ”What’s the hedge for AMC when it’s going insane?” The large market makers are much more likely to hedge these positions with other options than with the underlying stock. “The best hedge for a call you sell is buying another call,” said Sosnick, who was previously a trader at Morgan Stanley, Lehman Brothers, and Salomon Brothers. “If you buy another call, you’re hedging the volatility risk as well.” Meanwhile, a particularly large market maker may be able to hedge much of its portfolio with natural order flow, meaning it doesn’t have to buy or sell so much for hedging, another options expert told Quartz. Executives at Virtu Financial, a mega-market maker, said essentially the same thing in an Aug. 4 earnings call when explaining the trading company’s push into options: As a large market maker in US equities, CEO Doug Cifu said, “[w]e have the delta hedge in all these products.” Though the conventional wisdom—that market makers will buy up shares as a hedge for the options they’re dealing in—isn’t accurate, it’s still probably driving the market. Which is to say, if enough traders are willing to pay higher prices for a stock like Robinhood because of its options activity, then the hedging theory will work because people in the market seem to believe it’s happening, even if that thinking is based on a flawed understanding of what’s taking place. " dir="ltr" style="color: rgb(68, 68, 67); font-family: "Adobe Garamond Pro", Georgia, "Times New Roman", Times, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", "Droid Sans", "Helvetica Neue", "PingFang SC", "Hiragino Sans GB", "Droid Sans Fallback", "Microsoft YaHei", sans-serif, sans-serif; font-size: 22px; font-variant-ligatures: common-ligatures; background-color: rgb(255, 255, 255);"> Vlad Tenev, CEO and co-founder Robinhood Markets, Inc., is displayed on a screen during his company’s IPO at the Nasdaq Market site in Times Square in New York City, U.S., July 29, 2021. We are only just beginning to understand the ramifications of the retail trading boom. Take Robinhood, which had a lackluster debut. Its shares dropped 8% on their first day of public trading. But on Aug. 4, just a few days after the IPO, options contracts linked to the company’s stock became available, and the shares took off like a rocket. As many have speculated, the options did play a role in the roller coaster rally that followed—but probably not for the reason some traders think, especially if they haven’t accounted for changes in how trading firms hedge meme stocks. Options, or contracts to buy or sell a particular stock if it changes hands at a certain price, have become wildly popular with the retail investors, including Robinhood customers, because they offer a cheap way to bet on stock prices. Conventional wisdom is that the mere availability of these derivatives linked to Robinhood’s stock gave the shares a boost thanks to market makers, or companies that post bids and offers for stocks and derivatives (they’re the intermediaries most investors trade with). The thinking is that market makers in call options for Robinhood stock (a bet that the equity will increase in price) will also buy the company’s stock as a hedge, driving up the share price. This type of trade, known as delta hedging, neutralizes the risk of price fluctuations for the market maker. But that’s not what happens these days in highly erratic meme stocks, according to two options experts interviewed by Quartz. When it comes to meme stocks—powered by online sentiment on platforms like Reddit or Twitter and exemplified by GameStop and AMC Entertainment—market makers using this form of hedging can get burned, the options experts said. That’s because these stocks have broken down the typical relationship between options and the underlying stock. Part of an option’s price is calculated based on its implied volatility, or a trader’s guess as to the likelihood that a stock’s value will change. When a stock price goes up, its implied volatility typically goes down. This makes a rough sort of sense—if a stock is going up, in theory it’s because investors have more certainty about its future cashflows and profits. Meme stocks flip this around: The equity may shoot up in price, but it’s reasonable to expect that this price increase is highly unstable. During a trading battle between retail investors and hedge funds, shares of GameStop skyrocketed in January to more than $300 from about $30 a few weeks earlier. It was reasonable to expect that the record high stock price might come crashing down. (Or it could shoot up even higher—there was little or no way to guess what the price would do.) The implied volatility arguably got more unstable as the price went up. As one of the options experts we spoke with explained, this places market makers in a dangerous position: Imagine a market maker has sold a put on Tesla shares (a bet that the stock will decline in price) and likewise placed a short sale (a bet on the shares to decline) on actual Tesla shares to offset, or hedge, that position. If the shares jump in price, the market maker will lose money on the stock’s short sale. Ordinarily, the options price might be expected to compensate. But if the meme phenomenon is taking place, the put option may, for example, stay at a steady price. Because of the implied volatility input in the option price, the neutralizing hedge has broken down and the trader can lose money. For call options, the situation is basically reversed. To put things more simply, when it comes to meme stocks, the shares can’t be counted on to offset the gains or the losses on an option. This type of breakdown has happened in several stocks, including AMC, BlackBerry, Tesla, and GameStop. Market makers know this and have adjusted accordingly. “Meme stocks are completely idiosyncratic—there is no natural hedge,” said Steve Sosnick, chief strategist at Interactive Brokers. ”What’s the hedge for AMC when it’s going insane?” The large market makers are much more likely to hedge these positions with other options than with the underlying stock. “The best hedge for a call you sell is buying another call,” said Sosnick, who was previously a trader at Morgan Stanley, Lehman Brothers, and Salomon Brothers. “If you buy another call, you’re hedging the volatility risk as well.” Meanwhile, a particularly large market maker may be able to hedge much of its portfolio with natural order flow, meaning it doesn’t have to buy or sell so much for hedging, another options expert told Quartz. Executives at Virtu Financial, a mega-market maker, said essentially the same thing in an Aug. 4 earnings call when explaining the trading company’s push into options: As a large market maker in US equities, CEO Doug Cifu said, “[w]e have the delta hedge in all these products.” Though the conventional wisdom—that market makers will buy up shares as a hedge for the options they’re dealing in—isn’t accurate, it’s still probably driving the market. Which is to say, if enough traders are willing to pay higher prices for a stock like Robinhood because of its options activity, then the hedging theory will work because people in the market seem to believe it’s happening, even if that thinking is based on a flawed understanding of what’s taking place
It feels like the writer is giving us the worst of two worlds: 1) One one hand they're trying not to get into the details so that the poor readers don't have to think. 2) On the other hand the details that they do provide don't make sense. Why can't writers simply describe what is going on in appropriate detail? Instead the writer uses lots of words but still makes a mess of it by being really imprecise. Put a summary at the front of the article if you wish, and then write an article using adequately precise terminology such that it can be understood. A few specific points: "That’s because these stocks have broken down the typical relationship between options and the underlying stock." Nonsense. The person selling the option may have goofed up on how they chose to price the option when they sold it, but once it has been sold, the intrinsic value of the option is obvious and clear. This is like saying there's something wrong with the way scoring in football is determined because you're not having good luck picking a fantasy football team. "Meme stocks flip this around: The equity may shoot up in price, but it’s reasonable to expect that this price increase is highly unstable." I would expect that any professional trading firm that see a sudden rapid upward price movement in a stock would see that of evidence on a increase in the voltitility of the stock, regardless of any meme involvement. An incorrect buyout rumour could do the same thing as a reddit forum. Bad tips have been going around Wall Street for over 100 years. "If the shares jump in price, the market maker will lose money on the stock’s short sale. Ordinarily, the options price might be expected to compensate. But if the meme phenomenon is taking place, the put option may, for example, stay at a steady price." First off, this section is imprecise. Are we talking about the value of an option that they already sold, or an option that they continue to sell? Or something else? The example is of selling a stock short to hedge the sale of a put option. Why on earth would I sell short a rapidly RISING stock to cover a put option? As the stock is rising, they are not losing money. You would need to sell short to cover a put you sold if the share price was FALLING. As the stock falls and approaches the strike price of the option, you'd need to sell short and then your losses would be capped. The statement about the options price being expected to compensate also doesn't make any sense. Either you've already sold the option or you haven't. If you haven't sold the option yet, what are you hedging? There would be nothing to hedge. If you have already sold the option, then you've already been paid whatever options premium you are going to get. There's not some mechanism that kicks in and pays them more money. Maybe the author is talking about changes to the price at which someone chooses to offer a given options contract, but that doesn't make sense in the sense of compensating for losses on contracts already sold. "Though the conventional wisdom—that market makers will buy up shares as a hedge for the options they’re dealing in—isn’t accurate, it’s still probably driving the market." This is an interesting statement. I can parse it two different ways: 1) They're buying puts or calls instead of buying and selling shares. Big deal<sarcasm>, that just means they've shifted the need to buy or sell to someone else. 2) The market makers are wildly gambling. Either not hedging their bets or gambling with shares they don't have and can't get. As in $359 million dollars in Gamestop shares that failed to deliver. Or perhaps as in the Archegos use of swaps. "To put things more simply, when it comes to meme stocks, the shares can’t be counted on to offset the gains or the losses on an option." This is crazy talk. The option's value is based on the share price. Of course the shares cover the losses. If I engage in a covered call options sale on stock that I own, I'm 100% protected against any rise in share price irregardless of whether there are any "memes" involved. (I limit my potential upside on the price appreciation of the stock that I hold, and I haven't hedged the downside risk of owning that stock, but neither of those are losses on an option.)