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augieboo

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augieboo

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Re: None

Wednesday, 06/18/2003 8:47:20 PM

Wednesday, June 18, 2003 8:47:20 PM

Post# of 241
Max Pain & Delta Hedging

From an SI post by Mishedlo

To:Joseph Silent who wrote (59280)
From: mishedlo Wednesday, Nov 13, 2002 12:35 AM
View Replies (2) / Respond to of 76187
#reply-18227058

The reason I ask for the precise definition of that action is because I want to know if they are merely trying to minimize their losses at that point and be covered (to prevent further loss), or recover their loss by price exaggeration and make loss zero.

Fisrt off, I prefer 20K options at a single strike on a single side for best reliability. You can fudge if the stock is very liquid (AMAT KLAC for example) and the overall trend based on QQQ pain would appear to be large, and the stock in general tracks reasonably well in the direction of QQQ (EXPE does not track well at all). It is also probably best if the option position is not completely one sided. I also consider how well a stock has tracked pain in the past.

As for delta hedging.
I belive the big option writer seldom lose.
They prefer to collect both halves of the option pie.
That happens when both puts and calls go up in smoke at max pain.

BUT...
When that does not happen, delta hedging kicks in to prevent a loss. If they need to short a zilllion shares of something or buy a zillion shares of something to prevent a loss, well thats what they do. Then if we fall thru the floor, all the calls still expire worthless but "da boys" are not losing anything on puts cause on the drop they added fat to the fire by shorting to prevent the stock from plunging without them on board (causing them to lose a ton of $ on puts). Da boys have to share the option pie in that sense. They only eat the call side of the option pie and put holders make out big time (helped by the delta hedging that sent it reeling). But da boys did not lose on the puts side (because they hedged short).

What happened last month was those delta hedge shorts were unwound, momo players piled on, and we overshot on the way back up as pension $ came in at the tail end of it all. Da boys made $ on all the puts that expired worthless and had enough longs to cover the calls they sold.

M







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