Hacker Newsnew | past | comments | ask | show | jobs | submitlogin

In summary:

1. Softbank has been paying up to buy a mountain of call options on big cap tech stocks.

2. Lots of inexperienced traders have been piling on, buying those same call options, e.g., on Robinhood.

3. The brokers/hedge funds selling those call options have been hedging by... buying big cap tech stocks.

4. Passive funds have been mindlessly following along, "copying the market," getting more and more concentrated on big cap tech.

What happens if (i.e., when) 1, 2, and 3 unwind?



1) Shorted dated options have lots of gamma which amplifies the effects of this exponentially.

2) There are very few discretionary investors left, most are index funds. They targeted a few names which have outsized influence on indices. This in turn forces passives to buy those same names in order to keep tracking error low. Which then amplifies the effects from point 1, giving SB pnl which they can lever to repeat the cycle.

Source: hf head of quant trading


> What happens if (i.e., when) 1, 2, and 3 unwind?

Pop.


1. They’re probably ITM from earlier calls and reporting says they wrote OTM calls so that’s gravy.

2. The distribution is probably OTM on the balance and loses.

3. Brokers unwind, make money but not as much as 1 due to cost of hedging.

4. Passives are already tracking and are along for the ride excepting any new capital in.

Summary: Market correction while the rich get richer. Working as designed it appears.




Guidelines | FAQ | Lists | API | Security | Legal | Apply to YC | Contact

Search: