that may work north of the border ... you have seen what is going on here right ?
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Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable
- Thread starter AudubonB
- Start date
Runarbt
Active Member
jhm
Well-Known Member
For the last couple of weeks I've watched call options gain more per share each day than the share price has. For example, right now a Jun 2022 call option @ $1200 is up $265/sh while TSLA is up only $155/sh. This is unusual the delta on the call option is only 0.8160. So the in +155 on a share of underlying stock should only contribute +$126.48/sh to the increase in the call option price. The extra +$138.52/sh in the option price must be mostly due to the increase in implied volatility. But an increasing IV is little more than the willingness of option buyers to pay a higher premium. That is, demand for call options are rising so fast, that it outpaces demand for the underlying stock.
Perhaps someone more knowledgeable than I can explain how delta hedging works when IV is advancing so fast. Usually trader who writes a call option and hedges with a delta hedge would be holding about 82 shares of stock to hedge on call contract where the delta is 0.82. This supposedly matches the price change in the call option as the stock price moves. But clearly holding 82 shares right now would not protect the delta-hedger from the kind of price changes actual options are undergoing in the market. A delta-hedger that holds shorter-dated call options short could hedges these somewhat by buying later-dated calls. This is not a perfect hedge, but does limit potential loss. Thus, if we look all the way out to Jun 2022 options, there is no further to go out right now. So some traders will need to hedge with shares of stock (or maybe convertible bonds). Can anyone clarify how delta-hedging would work in this situation. This is not a textbook case.
Other long investors need to be careful about what this excess demand for call options may mean. Clearly, the market is anticipating an explosion of volatility, but actual volatility may disappoint expectations. So these call options could lose massive value if there is some sort of trigger event to dampen overhyped expectations. As demand is higher for call options than for actual shares, it also seems that buying shares could be the better value as we navigate volatility. When we get to the top of this bull run, those who a long on call options may want to deleverage en masse into shares. That is, holders of call options could become desperate to sell options and buy shares. In this scenario, shareholders can be rewarded even as call options go down in flames.
I would also note that shorts may a present be desperate for call options as a way to mitigate their losses. This would explain an fear-based willingness to pay a huge premium on call options rather than simply buying shares to close out the short position.
The stock price has fallen substantially in the time it took to compose this message. I'm not updating the numbers, as they are merely for illustration.
Perhaps someone more knowledgeable than I can explain how delta hedging works when IV is advancing so fast. Usually trader who writes a call option and hedges with a delta hedge would be holding about 82 shares of stock to hedge on call contract where the delta is 0.82. This supposedly matches the price change in the call option as the stock price moves. But clearly holding 82 shares right now would not protect the delta-hedger from the kind of price changes actual options are undergoing in the market. A delta-hedger that holds shorter-dated call options short could hedges these somewhat by buying later-dated calls. This is not a perfect hedge, but does limit potential loss. Thus, if we look all the way out to Jun 2022 options, there is no further to go out right now. So some traders will need to hedge with shares of stock (or maybe convertible bonds). Can anyone clarify how delta-hedging would work in this situation. This is not a textbook case.
Other long investors need to be careful about what this excess demand for call options may mean. Clearly, the market is anticipating an explosion of volatility, but actual volatility may disappoint expectations. So these call options could lose massive value if there is some sort of trigger event to dampen overhyped expectations. As demand is higher for call options than for actual shares, it also seems that buying shares could be the better value as we navigate volatility. When we get to the top of this bull run, those who a long on call options may want to deleverage en masse into shares. That is, holders of call options could become desperate to sell options and buy shares. In this scenario, shareholders can be rewarded even as call options go down in flames.
I would also note that shorts may a present be desperate for call options as a way to mitigate their losses. This would explain an fear-based willingness to pay a huge premium on call options rather than simply buying shares to close out the short position.
The stock price has fallen substantially in the time it took to compose this message. I'm not updating the numbers, as they are merely for illustration.
Runarbt
Active Member
Btw. Drop was fueled by macro drop.. so, we are good. 
Causalien
Prime 8 ball Oracle
Unfortunately, I am going to go hide and lay low for a while. Hopefully someone else can guide you.
LN1_Casey
Draco dormiens nunquam titillandus
1500's is still 600 more than we were this time last month. I'm perfectly happy with it.
I'm perfectly happy with it.
Runarbt
Active Member
This might be good. it prepares the road for after ER. With a lower start, less chance of sell the news, and with the road up to 1800 already travelled a beat should propell ut way further.
Todd Burch
14-Year Member
haha ok. Anyone else know what Causalien is talking about?
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