So when someone buys a call, the market maker needs to the hedge by buying some shares at that particular stock right now things are going euphoric and I’m wondering if this is because people instead of buying shares they’re buying call options and these call options end up being in the money and then what happens is the market makers they need to keep buying more and more shares is this what’s happening with this bubble right now?
Is this bubble created because people keep buying calls?
byu/crazybitcoinlunatic inoptions
Posted by crazybitcoinlunatic
6 Comments
That’s not how it works. Put options aside for this topic. There has been a massive increase in the money supply over the past 5 years. It’s now been dumped from the sidelines into the market. Fueled by amazing earnings (as a product of that money supply increase) and hyperscaler commitment to keep buying chips, with chips as the driver of the bubble, that’s how it is created.
It’s actually the opposite. If calls outweigh puts, market goes down and vice versa. When the market was dropping, believe it or not, a lot of people were buying the dip which is why it kept dropping.
It wasn’t until the call to put ratio flipped, and the market did a whole ass reversal. Iirc, the call to put ratio was like a 1 to 4 on the way up, which caused the bears to get squeezed out.
Money makers are not waiting for options to go in/out of the money, before making move. They usually would hedge their position at the same time.
Market maker hedging in the case of what you are mentioning (where insane rallies happen) occur only when the market maker is very negative gamma (they need to buy rips and sell dips of the underlying to hedge their exposure)
So market makers would need to be very short calls and puts, you would have to check the volume and OI of options during the rally vs before it started to come to a conclusion if this were the culprit.
What is more than likely happening in macro economic in nature and institutional/huge fund buying of mag 7. AI was pretty much validated as a viable return on investment via Anthropic, and the fact the mag 7 themselves generate the majority of their code via AI.
CAPEX was not shrugged off this earnings for this reason, and the almost 1 Trillion of all mag 7 being spent next year sent all chip and compute stocks soaring
lol
Yes, when someone buys a call, the market maker might need to the hedge by buying some shares at that particular stock if there isn’t a non market maker counterparty selling the call. If the call buying is explosive, a gamma squeeze can occur. But if someone buys a put, the reverse happens so some of the effect of call buying is offset.
For example, Google trades abut 20+ million shares a day. What do you think happens if an institutional trader buys 10, 20, 50 thousand shares? Price goes up but it had nothing to do with call buying. Suppose they sold shares instead. then, that would offset some/all market maker stock buying.
the short answer? Yes, a bubble can occur from MM hedging. But it can also be due (stocks) to those chasing momentum or systematic funds reacting to volatility, institutional trading, etc., or a combination of some/all.