In my exploration of tactics to remove liquidity from a market, I came across a strategy which I believe to have been commonly used in recent years. It is different from a classic pump and dump, because delta remains neutral through the whole process.
Purchase shares driving the price up, while at the same time selling calls to maintain neutral delta. You build a large inventory of shares, and at the same time siphoned cash through the option chain. This works especially well if you can drive up Implied Volatility at the same time: build hype through massive share purchases, sell many calls for the highest price possible.
As expiration draws near, you can begin dumping your inventory of shares. And here's the beauty of this strategy: you aren't that interested in profiting on the sales of shares. These are simply a tool to drive your Calls out of the money.
Your delta remains neutral through this entire process. After expiry the result is zero remaining inventory, and a boatload of free cash. This same result can be achieved in the opposite direction with puts and shorting shares. Can anybody think of a stock where this has occured?
Posted by bimi210
2 Comments
Meh. Sounds dubious.
> Purchase shares driving the price up, while at the same time selling calls to maintain neutral delta.
What do you think OMMs gonna do as you’re selling calls to them? They gonna sell delta (short stock), thus negating your effort to drive the price up.
> As expiration draws near, you can begin dumping your inventory of shares.
As you’re dumping your shares, calls will be losing delta and market makers will be buying back their short stock. Again, this would negate your attempt to manipulate stock.
The only way this works is if liquidity in options is way higher than liquidity in the underlying. In that case you can manipulate stock and hedge yourself in the options market. That’s what Jane Street did.
Congrats you discovered a covered call