• Sharebar

So I was thinking about the whole facebook scenario, and read patricks thread about what he'd done, and it occured to me that the only that own facebook stocks are the people that bought in, and this will most likely be the speculators/investors, who aren't looking to sell in the short term. Those that do want to short it, will have bought puts instead, trading a different instrument altogether.

I know there is some correlation between the option price and the underlying, with the market makers/option traders, but I can believe they would be wary of it, given how recent it is. edit: is the effect on the underlying half of the effect of a straight out sell on the underlying, after the number crunching on options, when you sell a put to someone, you edit : sell half the underlying (i think).

So, does buying a put decrease your chance of it becoming in the money, because there just aren't enough other people that would be selling it, as outlined above. No downward pressure on the underlying = no profit.

tll;dr, patrick man up and use alcohol and pills to help you sleep at night, short the stock properly.

Comments (9)

  • SirTradesaLot's picture

    Let's assume your thesis is correct about there being few owners of Facebook left who would be willing to sell their shares. How would your action of buying puts or shorting the stock be any different on the resulting price of Facebook?

    Many people are outright short Facebook as well. A bigger problem would be if there were too many people short the stock and some good news came out which would cause the price to appreciate rapidly as people scramble to cover their shorts (short squeeze). I don't think that is the case here.

    FYI -- When you buy a put, the market maker generally needs to short shares to hedge their position to maintain market/delta neutrality. So, if you buy a put, someone is shorting the stock.

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  • In reply to SirTradesaLot
    trazer985's picture

    SirTradesaLot:
    Let's assume your thesis is correct about there being few owners of Facebook left who would be willing to sell their shares. How would your action of buying puts or shorting the stock be any different on the resulting price of Facebook?

    Many people are outright short Facebook as well. A bigger problem would be if there were too many people short the stock and some good news came out which would cause the price to appreciate rapidly as people scramble to cover their shorts (short squeeze). I don't think that is the case here.

    FYI -- When you buy a put, the market maker generally needs to short shares to hedge their position to maintain market/delta neutrality. So, if you buy a put, someone is shorting the stock.

    I was under the assumption that the market maker shorts 50% of the put to cover his ass. Is this not true?

  • In reply to trazer985
    SirTradesaLot's picture

    trazer985:
    SirTradesaLot:
    Let's assume your thesis is correct about there being few owners of Facebook left who would be willing to sell their shares. How would your action of buying puts or shorting the stock be any different on the resulting price of Facebook?

    Many people are outright short Facebook as well. A bigger problem would be if there were too many people short the stock and some good news came out which would cause the price to appreciate rapidly as people scramble to cover their shorts (short squeeze). I don't think that is the case here.

    FYI -- When you buy a put, the market maker generally needs to short shares to hedge their position to maintain market/delta neutrality. So, if you buy a put, someone is shorting the stock.

    I was under the assumption that the market maker shorts 50% of the put to cover his ass. Is this not true?


    Depends on the strikes, but you are right that it is always less than 1 for 1. At the money are usually about 50%, in the money are higher and out of the money are lower. As the option becomes more in the money as the stock falls, the delta increases. So, importantly, if the stock moves lower, they need to increase their short position to maintain the delta neutral position

    adapt or die:
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  • Bearearns's picture

    You are also forgetting the buyer of puts can also be simply hedging his longs.

    The only time you see puts dropping underlying is closer to expiration when the person who sold the put is forced to short the shares because price is dropping fast. This as you can see leads to an avalanche, but just like an avalanche it is rare to see.As you can see after options expire on this date there is a huge ramp as those who shorted to cover their sold puts, cover and this creates massive buying pressure.

    Nearer term options are often used to gain more leverage when one buys or sells. For example depending on broker, if you buy put at $20 you can now buy shares

  • In reply to Bearearns
    trazer985's picture

    [quote=Bearearns]You are also forgetting the buyer of puts can also be simply hedging his longs.

    The only time you see puts dropping underlying is closer to expiration when the person who sold the put is forced to short the shares because price is dropping fast. This as you can see leads to an avalanche, but just like an avalanche it is rare to see.As you can see after options expire on this date there is a huge ramp as those who shorted to cover their sold puts, cover and this creates massive buying pressure.

    Nearer term options are often used to gain more leverage when one buys or sells. For example depending on broker, if you buy put at $20 you can now buy shares

  • In reply to trazer985
    Bearearns's picture

    Thanks and glad I could provide another perspective

  • Revsly's picture

    They can do. Like SirTradesAlot mentioned, the market maker generally will be trading delta neutral at inception, meaning that he has to sell shares to hedge his delta position. The other possibility is a DX (delta exchange), in which the Customer exchanges the delta at some agreed upon rate. If the customer wants to make this a live option (read non-delta hedged) then he must sell the shares in the market. For options positions, it's plausible it could cause a drop in price, just as a big seller of stock might drive the price lower.

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