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SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally (ft.com)
583 points by xoxoy 23 days ago | hide | past | favorite | 462 comments

This is hands down the most entertaining thing I’ve read today. SoftBank is responsible for the spike in gamma across the board, dumping massive amounts of money into OTM calls. Retail (WSB) speculators see unusual options flow, end up piling in on calls and amplify the effect. Market makers are forced to buy the underlying in order to delta hedge, and the price goes up even higher. Rinse and repeat...the positive feedback loop continues and stocks actually only go up.

The financial system is far more broken than people realize.

I’m guilty of taking advantage of this myself, but it’s basically been free money for the last several months. Up until yesterday at least...

As an outside observer, I used to believe the stock market was solid and mostly rational, and that obviously it could not be influenced by a single actor or a subreddit community, contrary to a "playground" like the Bitcoin market. I get the feeling everyone says they see the emperor's clothes in the stock market reliability, anticipating everything, but in reality it's just short term gambling and post rationalization.

Edit: punctuation

Part of that is due to the fact that most of the market is now passive investment. Being pension funds, endowment, etc etc.

The latest numbers i have seen is that 80% of the market shares is controlled by institutional investors.

That is a looooot of the market tied to a set of investors that cannot bet on anything else than up due to their own long term problems. At this point, the market is better viewed as a gigantic retirement fund/saving account than as a way to decide on price.

Once you look at the market that way, a lot more of the behaviours make sense.

Why do institutional investors undermine price discovery? This comment doesn't make sense to me.

> The latest numbers i have seen is that 80% of the market shares is controlled by institutional investors.

Institutional investor != passive investment.

As long as trades are happening, there is some sort pricing mechanism.

I'd guess there is there is too much money in it due to the fact that central banks killed interest rates and started buying government bonds as needed - where pension funds would hold those they now need to search positivie returns and there's just not enough good bets there - would explain why the valuations are sky high

You've confused cause and effect.

Declining expectations for NGDP growth/uncertainty lead to funds searching for yield in the credit markets, leading to declining yields.

Bond yields declined prior to Fed intervention [0]

[0]: https://fred.stlouisfed.org/series/DGS10

more due to the fact we massively move retirement payments to market investment instead of redistribution and at the same time boomer begun retiring.

Basically we moved back to a renting society.

Because their goals are not price discovery. Price discovery needs taking risk. All of them are not allowed to reduce the principal.

They would better reduce return than touch the principal.

This is a rent market. Not an investment one.

Rent market are more comparable to land value than to investment markets. Thibk of the use of corn as a relatively bad economic choice for profit but great for rent stability as an example.

That is what something like retirement and endowment need.

> As long as trades are happening, there is some sort pricing mechanism.

Sure but my concern is that pricing now looks less about fundamentals and more about the meta game of what other traders are gambling at the moment. What do you think about the price discovery mechanism for Bitcoin for example?

There is no such thing as "fundamentals," value is in the eye of society - so pricing is also in the eye of society.

Bitcoin is operating under a great deal of uncertainty about its future prospects/the prospects of blockchain.


Not just the market, property to. There's this giant floating pool of money thats looking for anywhere to grow.

How about reinvesting back into the people and infrastructure.

We're talking about private parties here, trying to grow their wealth for the future. What exactly are you proposing they do?

Government should embark on major public infrastructure projects and issue bonds tied to some collateral or benchmarks like for example a portion of property or sales tax in some area, for some limited period.

That's a great idea, let the private markets front the cash for infrastructure projects and let local gov bodies set the rate of return over a set period (using the tax fund). This means a small portion of tax money can go towards repayment and states/counties get their infrastructure upgraded faster. Can anyone weigh in on why this is a bad idea? I have no idea why this isn't already the case.

A lot of infrastructure is funded via bonds already, but the interest rate is fixed instead of tied to a percentage of property tax revenue.

This idea would have more uncertainty for the investors, so they'd want a higher return than for a fixed bond. Taxpayers would be less likely to vote for the measure because it would have to raise their taxes even more than a standard bond.

(that being said, bond measures often take the form of "a 0.2% property/sales tax is to be levied for the next 20 years to pay off the bond", which is actually pretty close to what is being proposed by the GP. The difference is who is left holding the bag if tax revenues don't meet projections)

Most of those bonds would be bought up by banks as usual, inflationary pressure would be caused by those bonds because of the temptation to print money to make up for the inevitable shortfall

A rising tide lifts all boats. If the majority of the money in the market is on autopilot then why not fluctuate it?

Theoretically the disconnect from reality will eventually catch up you and the whole system will suffer from a major correction.

The stock market can remain irrational longer than you can remain solvent.

God, this has been so true for me. I was trading puts on the massive increase in US Covid cases, but stocks just kept going up. And now we're hitting ATHs while economists are predicting the worst GDP decline ever. Gold and Stocks are both rapidly rising, which isn't really logical, since Gold is a save haven, usually.

I looked back at gold vs stocks and the last time stocks and gold rose at approximately the same speed, was just before the 2008 crash.

Interest rates are super low. The Fed's printing money like there's no tomorrow.

It makes a lot of sense that investors would want to put their cash in the market and/or take advantage of low interest rates to lever up.

If you're willing to bet the dollar's going to crash in the next few years due to Fed policy, it makes sense to write dollar-valued IOU's today and use them to buy stocks and gold, knowing you'll be able to pay them back with cheaper-valued future dollars.

There was a post by an economist that low rates is a tool in the hand of politicians and once the get a taste of it, they never let it go. At least I see this happening in India. Central bank is influenced by govts to keep rates low.

Don't know well about how US Feds and govt are incentivised

> If you're willing to bet [...]

> [...] knowing [...]

These things are not the same.

US dollar will never crash. It is defacto the currency that runs the world. It's a bit like saying the lake will overflow because millions of people are pissing in it.

And crash against what? Other currencies are faring far worse.

So like in say 1000 years the world will still be the same?

It'll crash one day. The world will change. Statistically speaking when it does it will likely be for the worse too.

You're currently right, but the world is changing


Sounds like recency bias. Every historically dominant fiat currency has eventually lost its dominance.

It doesn’t have to crash per se. The value can go down. As in inflation. This is already happening in some sense. It’s just accelerated when the real value you get back is lesser for dollar by the day. A few years back can you imagine buying a $1000 phone? The measured inflation is really convoluted. I doubt it measures the true value of a dollar. The good thing is other currencies will just get devalued equally considering dollar is the world currency for the most part.

People routinely spent over $1,000 on computers, cameras, video cameras, etc and a phone does all of those things well.

You can read about how inflation is calculated, it makes sense: https://www.bls.gov/cpi/questions-and-answers.htm

>which isn't really logical, since Gold is a save haven, usually.

I don't know anything about anything, but it seems to me this is a logical consequence of inflation? Purchasing power of $ goes down, prices (of everything) go up.

Inflation is on track for 0.44% annualized in 2020, about 1/4 of an average year due to the reduced velocity of money caused by the downturn more than offsetting the new money being printed.

Is there a way in which finical assets can inflate more the basic of goods that make up inflation metrics? Is gold even part of the index?

Like if all that new money isn't being used to buy things like food or even housing that factor into the inflation index than wouldn't we see something like this where gold and the stock market inflate because that's where the cash is going?

Maybe all the new money ends up in the hands of the rich elite, who just funnel it into the stock market, so it never really ends up inflating real assets. I could totally buy that these are the types that care the most about making the slider go to the right, and don't necessarily spend much of their money (or have so much of it that they already spent it on everything they possibly could).

Ding ding ding!

Lets assume the inflation remains contained in the financial sector. What does this mean e.g. for a young family with no inherited wealth, with average income and savings rate? How should they invest their savings? Isn't it more difficult for them to "break even" (in the sense that their capital income offsets their share of contributing to others capital incomes) than before the asset price inflation?

At a given instant in time, each unit of currency has to be owned by someone. So if the money supply increases by 10%, by the pigeonhole principle, there is at least one entity with 10% more money in one of their accounts.

Now I'll buy the idea that isn't necessarily going to cause shortages and price rises in consumer goods, but the idea that it doesn't cause changes in asset prices is too much. Are these rich people supposed to be idiots? There is no return on cash and new money is being created at a fast clip.

Pricing is a function of both supply and velocity.

Increasing money supply without any change in velocity or other exogenous factors is inflationary for asset prices, etc.

Real-life, however, is not a vacuum [0]

[0]: https://fred.stlouisfed.org/series/M2V

What inflation?

CPI conveniently doesn't measure asset prices.

Inflation has been "stubbornly low" for 20 years while asset prices have outperformed historical averages the entire time.

Asset prices seem to have diverged from the real economy because assets are primarily funded with debt (real estate, corporate investment) which has been artificially priced lower, while goods are paid with earned income which hasn't been manipulated.

But why is general asset inflation problematic? There's a pretty clear reason consumer good inflation is bad.

> Asset prices seem to have diverged from the real economy because assets are primarily funded with debt

Or maybe it's because with rising productivity, capital has become more valuable over time.

Asset prices going up ad infinitum means you can no longer afford a place to live.

In fact it would mean that the only people who can afford assets are people who already have assets.

> "Or maybe it's because with rising productivity, capital has become more valuable over time."

We have 0.1% interest rates, negative in some countries, that indicates a glut of capital, not "shortage of valuable capital"

The CPI does include rent. And if you check the listings, you won’t find that the money supply multiplying has led to prices multiplying. It seems like it’s just supporting current prices. If prices do start to rise too quickly they can gradually pull back that support.

The inflation in asset values (e.g. equities / real estate / gold).

People incorrectly assume inflation means "the price of everything goes up". The problem word here being everything.

Why? Well because prices aren't merely dictated by supply, but rather supply & demand. Simply comparing inflated money supply to the good supply is naïve, as it ignores to factor in the demand for different goods.

As so, for a dumb example, it's entirely possible to have inflated stock prices but not see inflated sock prices, if all the extra money is chasing stocks, and not socks...

> People incorrectly assume inflation means "the price of everything goes up".

Because they've spent a few generations making sure people don't understand the difference between price inflation and monetary inflation by using the two interchangeably.

This whole sub-thread is a perfect example, "the Fed has been printing money like there's no tomorrow but, look, there's only 0.44% inflation".

This makes a lot of sense, thanks for the explanation!

CPI is inherently flawed due to basket of goods methodology and consumer substitution for cheaper/different alternatives than in the past when prices to their current basket changes. For example average housing spend could be steady while people get smaller homes and CPI would not reflect that. Likewise with lower quality food by some metric or other.

So much like how the S&P/NASDAQ has a bias for growth because losers are swapped out for winners, the CPI basket has a negative price bias as expensive goods are swapped out for cheaper ones.

Monetary inflation leading to shifts in trading rates for other assets. USD is down against many other currencies lately (ie I checked CAD, EURO, GBP)

> Monetary inflation

It's incorrect to refer to monetary inflation as just "inflation." If you're talking about price inflation, we're not seeing that yet - although 5 year inflation expectations are popping back up again [0]

So far, it's looking like the Fed is doing as best as could be expected.

[0]: https://fred.stlouisfed.org/series/T5YIE

Sure. But we are talking about inflated asset prices. Printing more money just makes the truly valuable things take more units of an inflated currency pool

> Printing more money just makes the truly valuable things take more units of an inflated currency poo

Only true if everything else holds constant. Also, wouldn't just apply to asset prices but all prices.

Everything else, unfortunately, is not holding constant. [0]

[0]: https://fred.stlouisfed.org/series/M2V

Now this is just my conspiracy theorist side coming out, but I think the only reason the government cares about frequency of exchange is that they get a cut on each event. The more frequent the exchange, the sooner they get 100% of it back.

Not only is inflation extremely low, but we were at serious risk of a deflationary spiral without all the funny-money that the feds are pumping into the economy. Central banks introduced liqudity to make sure deflation did not happen.

Foreign demand for the dollar is at all time highs. People forget this and don't think about the impact that this has on currency prices.

Also, the "inflation is actually happening they just don't measure it right" crowd are delusional. Maybe they were right before covid, but they're extremely wrong now.

> Not only is inflation extremely low, but we were at serious risk of a deflationary spiral without all the funny-money that the feds are pumping into the economy.

Was reading just the other day that inflation is actually underestimated right now.

People are buying basics, like food, at far higher rates than normal, prices for those basics are rising, but the CPI hasn't adjusted the ratios. Ergo prices are higher where it counts but the index doesn't see it.

Inflation is low as measured by the CPI. Inflation in financial assets (higher PE ratios for stocks, lower yields on bonds, significantly increased real estate prices in attractive cities, etc) are significantly higher.

In my opinion, continued inflation in financial assets will / is already partly causing inequality. It's not good for society if the middle class has trouble buying houses or real estate - it tends to lead to a lot of anger and political polarization, as we've seen.

IMO the fed pumps money to reduce the risk of collapse of tbtf entities. It can't do much to reflate the economy as it depends on the banks to lend them out.

My understanding is that gold measures the (dis)trust in fiat currencies, with the USD the biggest part of it.

That is what some people think, but the only thing we know for sure about the price of gold is that you have to pay its price in ounces to get one ounce of it.

> US Covid cases, but stocks just kept going up

Just because you don't understand why the market is priced a certain way doesn't mean the market is irrational.

Perhaps stocks went up because of the expectations generated by past Fed policy stances post-2008.

Why stocks are going up:

Interest rates are insanely low, which means putting your money in the bank, or in bonds, has a near-zero return. There are tons of massive funds (vanguard, etc) that have promised a return to their investors, and they're moving money from interest-based investments to other investments. This has caused a ton of money to be put into the stock market, which drives multiples up.

Why gold is going up:

The government is printing a ton of money to deal with the pandemic. This causes USD's value to drop compared to other currencies. There's a small (but real) possibility that the US dollar stops being the world's reserve currency. This causes people to seek value stores other than USD. This includes gold, bitcoin, euro, yen, renminbi, which are all up vs USD since the pandemic started.

These two things happening at the same time doesn't necessarily mean the stock market will crash.

A lot of people that replied to you seem to be quite sure in their explanation (i.e. fiat currency is losing value due to QE etc.) I think all we know is that we actually have little idea of what's happening and what will happen in the near future, since this situation is quite unprecedented. During the great depression the fed had a tightening instead of easing and the market crashed hard, sure, but what happens when there's a crazy amount of easing instead? Guess people can only look back in 20 years or so and draw some conclusion. Being too sure of anything at the present moment would be quite overconfident IMO.

FWIW the GDP decline may have been overblown, and it seems at least plausible that it will be followed by GDP spike, as production fills in unmet demand at higher prices.

Somethings will get filled later, eg: a rush on wedding venues when folks catch up with delayed plans...

Somethings are lost opportunities, eg: _today's_ lunch being provided by safeway + my kitchen vs a restaurant.

Well, NOTHING about the price of gold is rational. There is no reason it should be a safe haven. That’s pure investment fiction.

The explanation for your conundrum is that the value of fiat currencies is dropping. It's why gold and stocks can both be going up.

And no, this is not due to inflation (Which is near-zero). This is due to QE, and easy credit.

Gold has been dropping for a month...

Great quote. Aside: I thought it originated from John Keynes, but it looks like that earliest written record goes back to 1983 to a financial analyst named Gary Shilling:


"Addendum: A small number of libraries apparently hold a transcript from a 1983 seminar during which Shilling reportedly employed the adage."

This is what all the people who are continually wrong say to excuse their failure.

The efficient market hypothesis is the biggest lie in modern history. Bubbles don't happen in efficient markets.

Research paper: Markets are efficient if and only if P=NP https://arxiv.org/abs/1002.2284

Can this be used to prove P != NP ?

I am incredibly skeptical of the "iff" statement. How the hell could it be possible that

P=NP -> Markets are efficient.

Because if P=NP the vast array of the majority of known "hard" problem becomes trivial to solve, not just market information. That's the reason P=NP is considered so consequential to society in many ways if it does happen to be true and implementable.

But what about the "P=NP but nobody knows how to do it yet" case.

Which implies that the markets, up to today, aren't efficient. Because nobody knows how to do it yet.

So then it appears it is possible that P = NP and markets are not efficient, so it is not true that "Markets are efficient if and only if P=NP" because P = NP !-> Markets are efficient

For the markets to be efficient today they must calculate P=NP to achieve the solution. Nobody has done that yet. Markets today are inefficient as nobody has implemented P=NP to do the required calculation. Markets in the future could be efficient, but today's ones are not as we have to gauge market value the traditional way with incomplete information and guesstimation and modelling.

But the scientific consensus so far is heavily biased towards the presumption that P!=NP.

I think I understand the sketch of the proof and pretty familiar with the P=NP debate. Perhaps my point is pedantic, and I've also looked at the paper and seen that it doesn't try to prove an "iff" claim, but:

To prove an "iff" you have to prove that Markets are efficient -> P = NP and P=NP -> Markets are efficient . I buy the first claim entirely, but not the second.

Let's assume P really does = NP, but as you've said "nobody has done that yet." Then, markets today must be inefficient, but that is T -> F which is impossible if P=NP -> Markets are efficient □

In lay words, how can it be true that `markets are efficient if and only if P=NP`, if it is possible that `P=NP but markets aren't efficient`.

I think we're on the same page, just different paragraphs. I think I get the gist of your line of reasoning.

Let me try an analogy for the if True case. Gravity (P=NP) exists, and always has. But we didn't understand it a few hundreds of years ago. Before we understood it, we didn't have interplanetary rockets (Efficient Markets). But we do now, and they were never outright impossible before our understanding of delta-v and other aspects. But before we had that understanding, we just straight up didn't have rockets.

Meanwhile if hypothetically gravity was, perhaps stronger or more pervasive over longer distances (P!=NP), it could have stopped interplanetary travel altogether and we would have never have achieved it.

We are just in an equivalent time period to that time in the 1600s before we understood, one way or another, what was ahead of us. If markets can be efficient in the future, they could always have been now and in the past. We just didn't have the tools to figure it out.

Analogy seems roughly right, if it was a statement like "P=NP -> Markets could possibly be efficient" then I'd buy it.

But I think what's more interesting is that

"Markets (present-day) are efficient -> P=NP" could plausibly be true, suggesting that the contrapositive is true: "P!=NP -> Markets (present-day) aren't efficient." Given current state of thought around plausibility of P=NP, that seems pretty powerful nonetheless.

With the slightly stronger statement "Nobody currently possess a polynomial time algorithm to solve a problem in NP -> Markets (present-day) aren't efficient" it starts to become quite likely markets aren't fully efficient.

This is going to be great fodder for some debates, thank you very much.

I’m reminded of some research I tried to get published a while back. One editor comment came back with a suggestion to reject simply with “this appears to contradict the EMH.” No further explanation.

Well, no shit. It said so right in the introduction. I think this is what’s called “theory induced blindness”

The efficient market hypothesis just states the market represents the sum total of all available information.

If everyone thinks stocks will go up, then the efficient market hypothesis would support a bubble.

This is a misunderstanding of the EMH. “Efficient” does not mean “rational” or “always right”. It simply means that, at any time, the difference between actual prices and “rational” prices is random.

It’s important to understand that efficiency is something that markets approximate. The EMH may be more “true” for you than for someone with a dedicated fiber line between the NYSE and the CME.

Here’s Burton Malkiel in more depth about what the EMH actually means: https://www.forbes.com/sites/quora/2014/06/13/what-does-the-...

That actually reinforces my point. For bubbles to occur, the delta between the price and the “rational” price must not be random. In bubbles prices exhibit strong temporal autocorrelation.

Assuming bubbles are real, which is somewhat unprovable. There are careful ways to falsify different formulations of the EMH.

"Bubbles" is not one.

The (strong form) efficient market hypothesis (EMH) doesn't state or require that there be no bubbles. The EMH means that bubbles are extremely hard to predict/see, largely because of the market's feedback loop.

Is there a distinction between an efficient market and a efficient market subject to propagation delays? It would seem that there is a limit to how fast information can be disseminated and the resulting reaction time. The market may always tend towards efficiency at some time scales and not at others.

> Bubbles don't happen in efficient markets.

But how do you know a bubble ahead of time?

Tesla looks like a pretty obvious bubble, but what do I know?

> what do I know?


Interacting with traders would have broken you of that illusion too. Professional traders are much more prone to group think than they’ll ever admit to, which occasionally causes the market to do sub-optimal things.

I am more and more coming to the conclusion that a huge portion of susceptibility to groupthink even seems to be a central requirement to be a "good" trader (as in: one who outperforms the market).

If you just go with the trend most of the time, you take part in a self-amplifying hype cycle that pushes all participants' equities higher. Whereas if you try to "outsmart" the group, you will fail most of the time, even if you might be right in your skepticism, because stock prices aren't strictly based on actual objective reality, but more on the perception of reality by most market participants.

Aka the important thing is not to be right, but to guess when most people will also decide you're right.

I think you just described the Keynesian beauty contest: https://en.m.wikipedia.org/wiki/Keynesian_beauty_contest

Exactly. If it eventually turns out you were right, but most people didn't realize that at the time you traded according to your eventually-proven theory, you will have incurred huge losses at the point in time you finally are proven right. The icing on the cake is that you might even have given up on your idea and eventually decided to just go with the flow regardless of how stupid you think it is, and that might just be the time the market eventually concludes you were right all the time. Then you lost twice.

If one is a true contrarian then one would certainly stick to their position until the end, or at least wait for chances along the way while unyielding in their underlying belief. Otherwise the only conclusion is that they are not firm enough in carrying out what they believe in. Of course if they have a bad timing in their execution, they would still end up losing, but lose twice they won't.

I don't know how much or how little influence things like Robinhood and WSB have but it sure is entertaining to read about. I'm just hoping my conservative retirement investments don't get tanked for the lols

> how much or how little influence things like Robinhood and WSB

Every attempt at seriously measuring this, and there haven’t been many I’ve found that can be publicly shared [1], found close to negligible levels of broader-market effects.

$4bn in options buying, on the other hand, will do it.

[1] https://ofdollarsanddata.com/robinhood-trader/

With the way the market moved last few weeks (especially AAPL and TSLA), you could be forgiven to think the Robinhood effect was real. Especially when people like Matt Levine and even WSJ starts talking about it. People working from home, nowhere to spend money, seeing market news everyday and then jumping on to the most popular app to trade - all very believable for an unsophisticated "investor" like me.

I remember seeing a post on r/options this week about exactly this - large volume OTM calls causing MMs to buy stock and inflate price. This news has been very interesting in light of that.

> large volume OTM calls causing MMs to buy stock and inflate price

I’m a former options market maker. Seeing large volumes of retail flow is very different from seeing a giant institutional order. It affects what goes into the market versus gets internally crossed and what gets hedged and to what degree and how.

Individual investors have a moderately bad track record day trading. They have an abysmal one with options. I’m a decade out of the business, but we almost always defaulted to taking retail flow at risk.

Thanks for your insight!

So basically, the individual investor is screwed because they can’t figure out institutional orders, but market makers can that allows them to hedge?

I believe JC was saying that individual investors make bad choices, on the whole. Institutional less so.

Consequently, as a market maker who wants to limit their risk if a trade goes sideways, optimal hedging for each looks different.

(Part of this is probably related to the distribution of orders. I've heard large enough individual flow tends to mostly self-average.)

> all very believable for an unsophisticated "investor" like me.

Yeah, the problem here is that irrational picks by these people working from home are just opportunities for arbitrage by the institutional investors, who stabilize the price.

If you invest for the long term this has no effect at all.

I am reminded of the movie Pi [0].

[0] - https://en.wikipedia.org/wiki/Pi_(film)

Do people not realize the market can be easily manipulated? Do they just think all the regulation was made up for no reason?

It's important to note that even a system composed of rational actors influencing a common stock need not be stable in itself, nor are the rational actors guaranteed to collectively settle on the equilibrium that maximizes their collective utility.

The stock market is just hysteria fueled by 401k retirement funds.

I always saw the stock market as governed by heavy hands and hype, and always assumed that investors need to MOSTLY base their financial models on a simulation of heavy hand agents and hype rather than fundamentals.

If we wanted a stock market based on fundamentals, it should not be a free market. Instead, the power to set prices should be left to qualified experts in each stock's industry, and stocks should be allowed to change hands only at those prices. The experts should come from both scientific and business backgrounds and not analysts who spend their lives on Wall St. and are so incredibly out of touch with technology. Unfortunately the reality of the system we have created is that the more knowledgeable you are about something, typically the less money you have, and the more money you have, the less knowledge you have. We need to reverse that.

> Instead, the power to set prices should be left to qualified experts in each stock's industry


> Human beings who spend their lives studying the state of the world, in other words, are poorer forecasters than dart-throwing monkeys, who would have distributed their picks evenly over the three choices.

"He picked two hundred and eighty-four people who made their living “commenting or offering advice on political and economic trends,” and he started asking them to assess the probability that various things would or would not come to pass, both in the areas of the world in which they specialized and in areas about which they were not expert"

This is a little different from what I was suggesting. Predicting the future is an inherently difficult task for experts and I'll give you that.

Rather I'm suggesting that experts set a valuation based on known facts about the company and the state of the industry.

Here's an example. I work in the self driving industry. I always knew based on state of the art tech that Tesla couldn't possibly meet their aggressive timelines of full self driving. I think it's realistic one day, but not on the timeline they claimed a couple years ago. However, the reality is that the public is duped into thinking they'll be on time, and so what happens? I have to base my investment based on what the public thinks of Tesla, rather than what I think of Tesla.

Here's another example. Uber car crashes. NVIDIA stock crashes the next day because the public thought it had something to do with NVIDIA GPUs. I, and all other ML experts should have been able to call this out and freeze the price of NVDA and say "we have it on good authority that NVDA did not do anything to cause that car crash".

The current way the markets work shifts the paradigm from "invest in what you believe in" (which I is the way the world should work) to "invest in what you don't believe in but what everyone else is fooled into believing in".

I mean, the incentive structure is such that I've even bought stocks in many companies I hate, and sold or put stocks in companies I believe in from my scientific background on first principles. Somehow that isn't the way things should work.

> Uber car crashes. NVIDIA stock crashes the next day because the public thought it had something to do with NVIDIA GPUs. I, and all other ML experts should have been able to call this out and freeze the price of NVDA and say "we have it on good authority that NVDA did not do anything to cause that car crash".

See, but you don't actually know that's why the price of nvidia fell, nor do you know that it is an irrational reason for the nvidia stock to fall. Just because you work in the industry doesn't make you an expert on pricing.

There's lots of problems with this idea (it's incoherent wrt supply&demand, why should people closely affiliated with an industry be the one's setting prices, prices should reflect future expectations not current valuations).

> Predicting the future is an inherently difficult task for experts and I'll give you that.

But that's exactly what prices do. Why would I buy any stock at all unless I'm making a forward prediction about what is happening?

> Why would I buy any stock at all unless I'm making a forward prediction about what is happening?

That's exactly what I'm proposing we should change. We should be trading on a company's ability to make the world a better place. That would align incentives across people in a much better way than earnings reports. It also, incidentally, ensure that a company's profit structure is designed to align with its mission rather than align with some arbitrary earnings report deadlines.

I realize that metrics for this are hard to design, but we're in the 2nd millenium A.D. and it's okay for us to revise how we think about money.

I believe in a future of clean energy electric power, and it's f*ed up that I can't always invest in it because there are times when investing in oil gets me more $ that I can use to improve my own personal clean energy efforts while investing in electric would cause me to be at high risk of losing money, and therefore depend on oil because it's cheaper. That's a really messed up, convoluted system right there.

> I realize that metrics for this are hard to design, but we're in the 2nd millenium A.D. and it's okay for us to revise how we think about money.

It's not just that the metrics are "hard" to design. It's a question of why would I buy stocks based on a company's ability to make the world a better place. What makes the "stock" piece of paper worth more when the company does more to make the world a better place. For real-life stocks, it's the expectation of future buybacks/dividends. For your metric, it's unclear why anyone would participate.

> why would I buy stocks based on a company's ability to make the world a better place

I'm precisely proposing that we change the incentive structure in a future version of the economy such that it would benefit you to invest in a company's ability to make the world a better place.

That would eliminate OP's problem, among lots of other things.

I'm proposing that the role of investors should be fully aligned with the role of scientists and engineers, and the incentives should be designed such that that is the case.

Captialism 2.0, if you will. It's a quarter-baked idea, and there are lots of questions to answer, but I'd like to kickstart and encourage more thought and discussion about a future revamped economic system that aligns incentives better than what we have today.

Well, you can do that. Go invest in these good companies. There isn’t anything stopping you from doing it and encouraging others to do it.

You might have some advantages, but you have 10x more blind-spots.

What you believe about Tesla evaluation based on Self Driving might not matter because even if they miss that timeline, maybe they execute on their scaling or batteries or whatever.

A huge company has many, many different things going and different analysts think different things matter far more.

So you would need a whole group of these 'experts' working together evaluating each aspect.

Now even worse is that expert don't just have hard time predicting the future, but are actually the worst at doing it in many ways. Tesla and electric cars being a perfect example. The amount of car insider that believed electric cars were absolutely not viable as a buissness was tiny.

Even worse is that even if assume you know that some technology X will not hold up to the companies claims, their should maybe still go up based on competitors. I don't believe that Tesla can do Self Driving in the time-frame they claim, but the news about the competitors is even more worrying.

Literally everything is connected in extremely complex way that no experts can understand. The temptation for smart people and expert to think they can is a deceit.

> Uber car crashes. NVIDIA stock crashes the next day because the public thought it had something to do with NVIDIA GPUs.

This is unlikely. More likely the stock crashes because the event can be expected to decrease public trust in and enthusiasm for ML in general.

Blame for a one-off-event in a specific market usually isn’t a big deal. Adverse consumer sentiment with long-lasting impact on your entire bottom line is.

That too is a problem. The public shouldn't be the ones to decide whether or not we trust self-driving cars as a society. Science and hard data should decide that. Valuations should be determined accordingly, based on that science. In this particular case, the valuations of the entire self-driving industry should have been pegged by experts in the industry while the valuation of Uber should have been knocked down for negligence.

Trusting the public to set valuations on a per-trade basis directly results in the heavy hands at the likes of SoftBank scooping up full control.

You can find plenty of people who will argue vehemently that it isn't legalized gambling on top of a pyramid scheme. One that can collapse faster than you can say "bank run".

We were talking about banks 'making money' by giving out loans the other day. The banks actually have collateral and the fractional reserve. The only 'money' in the stock market is during active trading. Every penny of it leaves after the last trade is settled. At night the Dow is only worth the liquidation value of the companies (and that's if there are only common shares, otherwise forget it), and that's a smaller fraction than either the collateral or the fractional reserve banks maintain. Let alone both together.

fractional reserve is an outdated myth, read "Money creation in the modern economy" by the Bank of England


The last few months have been pretty crazy. I've been tracking WSB's most commented stocks as a sideproject - https://topstonks.com

Up until yesterday you could reliably hop on whatever the hivemind was interested and make some money. They even foreshadowed the market drop by mentioning the VXX before the correction.

It'll be interesting to see what happens in the next few days.

That's surprising given the conventional wisdom that you're supposed to inverse WSB. If inverse WSB isn't working then that means something really weird is happening.

Ah yes, but the pros know you always inverse the inverse.

Good old stone trick.

Inverse the gain porn —- Don’t buy TSLA on the day everyone is posting screenshots of their $4M accounts —- Ride the wave of the self-fulfilling DD.

That was terrible advice until, well, yesterday. It's been a straight line rocket ship to the moon. Each and every gain porn post would have been a solid entry until yesterday.

TSLA was an outlier. Something that I read (not on WSB) is that when it becomes too easy to make money on the stock market, that means there's about to be a big correction.

Is that the conventional wisdom of an actual day trader or just a wsb lurker?

Not trying to be snarky, just honestly curious as I have seen very similar comments on wsb.

I've no dog in these fights btw. I don't actively manage my portfolio and have little interest in ever doing so. Though I do enjoy reading about the failures of those who do day trade with millions.

It's nothing more than a joke. You have no way of knowing what the true majority opinion is, nor does that translate to real trades which involve a lot more parties and money.

And being the contrarian isn't profitable except in rare scenarios. The dips this week were a minor pullback. Anyone who kept going short while waiting for this would've been insolvent by now.

a broken clock is always right twice a day

What change happened yesterday? I've seen something about changes made yesterday a couple times now and I'm not really sure what to search for.

Nasdaq dropped 5%, s&p dropped 3.something

Amazing work, I've been doing something similar in my free time and it's a lot of fun.

That's awesome!

Would love to see a comparison to hyped cryptos on /biz/

>SoftBank is responsible for the spike in gamma across the board, dumping massive amounts of money into OTM calls.

Lots of speculation that they aren't the only ones. The recent run up in TSLA looks suspicious as well; huge volume on way OTM call buying.

Here's a random reddit thread from months ago:


Looks like SoftBank bought $4 billion in options over the summer. Retail accounts purchase $34 billion per month in options so I'm not buying into the theory that SoftBank is to blame for this.

Keep in mind that 4 billion (likely Softbank invested more) means 100x in stocks. i.e. a 10 billion investment in call options 'generates' 1 trillion in extra market cap (because of dealers hedging). That is 1/3 of AMZN or 2x TSLA and so on at current (not March) valuations. Such concentrated volume CAN move big stocks and in turn indexes.

Even if the market let go a bit now - Softbank has literally cornered the market for so long - they still make a killing in the process.

This is totally incorrect. Individual options contracts are indeed written against 100x of the underlying asset but this has absolutely nothing to do with the relationship between the price (premium) paid per contract and that of the underlying share. To given an example, you could find a put option whose premium is actually equal to the current market value of the underlying (i.e. a merely 1 to 1 relationship) or one that's so far out of the money that it's a 1 to 1000 relationship. Without knowing more details about the precise options SoftBank bought, we cannot infer how much market cap in underlying shares the $4bil corresponds to.

The concept of notional value is more complicated than that. Dealers don’t hedge the full notional value they hedge only enough to cover the delta and gamma on the option.

True but at the current high implied volatility of the affected symbols the delta/ gamma has been high —> lots of hedging needed. Big loop.

Correct, but not 100:1 hedging.

In addition to that, they match orders in real-time, so they might not even need to hedge partially because they have offsetting positions coming in.

how are retail options different from softbanks options. if there are 34 b of retail calls purchased that would dwarf softbank if done in the same time period

I don't think the retail purchases were as concentrated.

If that’s true, that’s 34B in the total options market, this 4B is targeted at like 5 companies.

Retail buys that much total, not net. And retail mostly buys puts as a hedge to their existing position. SoftBank introduced $4b of premium directed in the same direction for new deltas.

source on retail investors? I also believe retail is having a larger effect, I just haven't seen this number before.

Hasn't Elon been complaining about short sellers for a long time? Shorts can do fucked up things to trade volumes when it comes time to pay up.

Every public company CEO complains about shorts. It's because short sellers depreciate the stock value by

a. creating more supply

b. signaling the stock price is overvalued.

Both of these things annoy those whose compensation is strongly tied to stock price performance.

> time to pay up.

I'm not sure what you mean by this. Are you talking about short squeezes?

Squeezing is what happens to short sellers who are wrong. I suppose "when they get squeezed" would have been more accurate, but I was failing to put that into words.

"wrong" is a very loaded word to use in this context and it's not clear what you mean.

Wirecard short sellers were "right" (as in their thesis was corect) for many years before the stock price reflected their beliefs. Some of them probably got squeezed (and quite a few got in trouble with various financial authorities).

It's either a bad bet or it isn't.

This encompasses both direction and duration, so getting one of them wrong, is still wrong.

I see the appeal in using the return as a way of judging the bet, but I think it's too simplistic.

Reason #1: In investing, you can do everything right and still lose money. This is because there is never certitude, and you can only play the odds.

So, if you make a bet with a 90% chance of winning, and yet you still lose, was that a bad bet?

Reason #2: Most people like to think stock prices reflect reality somehow and the mechanism through which that happens is people buying or selling stock to reach price equilibrium. So, in that sense, a good bet would be one that pushes the price towards reality.

TSLA calls have been ridiculous the last few months. Buy >50% OTM calls with expirations 1-2 months out and still make money. No wonder it looks like free money.

There were multiple instances where I bought absurdly OTM TSLA weekly calls (sometimes > +200% or as far as I could out) at open, and sold as soon as an hour later for profit.

Earlier this week, I bought Tesla $800C’s despite the stock trading in the 400’s and sold for 300% returns later that day. I’m not one to day trade, but when opportunities like this are on the table it’s hard to resist.

Yeah though if somebody bought a high leverage call on Tesla Thursday they might have lost it all in a day. The thing is it's hard to predict when the rally will end. You can only make predictions with some, or maybe increasing, level of certainty but it's still a bet.

Buffet has complained about how he has to be subtle to move in or out of positions because he is so big he creates his own weather. He seems to care whether he makes money from making good choices versus brand recognition. It sounds like he has to use third parties to do big moves and of course they are going to want to take a bite. Nobody is going to move millions of dollars of inventory for you out of the goodness of their hearts.

Someone who does not give a shit can do a lot of damage without technically breaking the law.

> He seems to care whether he makes money from making good choices versus brand recognition.

No, no, no he doesn't. He has to be subtle so people don't realize what he's doing and pile in ahead of him and drive up the price before he has a chance to build up a position. It has nothing to do with "caring" about how he makes his money.

Genuinely curious, has Buffett said this before in an interview somewhere or have you asked him personally? OP wrote “seems to,” but your response suggests more confidence.

He has been quoted numerous times about avoiding having people front-run him over the last 50+ years. He negotiated special disclosure rules with the SEC at one point to avoid disclosing new positions quickly, IIRC.

Would love a source on buffets disclosure rules.

Best I could find, although behind the WSJ paywall: https://www.wsj.com/articles/SB10001424052970204319004577084....

(Archive link: https://archive.is/fKzDr)

There aren't any formal rules that he lives and dies by, but read "Buffett: The Making of an American Capitalist" by Lowenstein. Buffett -- or at least Lowenstein captures -- expresses concern for people buying before he does.

Entertaining and wrong. confuses cause and effect. The surging stock market leads to the rise in implied volatility, not the other way around. This s a common occurrence and not indicative of manipulation. This pattern happened in 1997-2000 too. The S&P 500 and volatility rose together for 3 years strait.

A rising stock market almost always leads to a drop in implied volatility. A falling stock market leads to an increase in implied volatility. The spot VIX is inversely correlated with the S&P.

I mean just look at the spot VIX. It hit 38 at the peak of the crashing yesterday, and settled around 30 today. [1] 0.3 delta option premium on S&P 500 index futures (/ES) is up 50% from a few days ago.

[1] https://www.investing.com/indices/volatility-s-p-500

up to a certain point it does. but not when the gains become too steep. Imagine if the S&P 500 was to go up 100% in a single day. now the range of potential price movement has been increased dramatically, so instead of the annual volatility parameter being around .15 or so for option pricing formulas, it is a much higher value, hence higher implied volatility.

In a sense, I suppose. A simultaneous rise in the VIX and the S&P usually precedes a crash. That's why I bought puts 2 days ago.

Good luck. I wish I had the stones for that.

Haha I’m very much an amateur, and this is a strategy I’m going to backtest first.

The tail has been wagging the dog for a very long time.

I have been researching this aspect of the options and futures market for along time.

Many of my strategies factor in the weight of when the derivatives markets are controlling underlying prices. You can often take advantage of how markets are formed, and stop using those strategies when something macro is occurring.

I used to trade butterflies back in the early 2010s for this, the max pain concept is based around this as well.

Its only funny that Softbank is the perpetrator because it is so large and full of dumb money whose LP's are recipients of money supply expansion. Thats a new scale for the options market.

I’m sympathetic to your argument, but what’s the evidence one way or the other?

Yeah seriously. If someone knew why stocks are failing they would be rich. Similarly, why they are rising. The only reason is someone is buying and someone is selling, any other reason is to get clicks.

Yesterday's drop you could see it coming 5-days ago but if you had gone in 5-days ago you would not be making money today, so it's hard to just time it that well. RSI was high, volume was drying, many other indicators.

Edit: To add let's not forget there was a huge run on Tech so everyone is re balancing. This is a BTD opportunity.

The standard response to anyone who posts something like this is still “post positions or stfu,” correct?

Not here. And if you try that on WSB you'll need more name-calling.

Here were my positions yesterday. I got hit up on AAPL/TSLA which were being held from a day earlier. However, during the market this is what I did:

executed: BTO SPY 2020-Sep-09 340 Put @ 2.39 DAY executed: BTO SPY 2020-Sep-09 340 Put @ 2.72 DAY executed: STC SPY 2020-Sep-09 340 Put @ 2.90 DAY

At peak it was 40%, but I just needed the 10% to make up all my losses. Then I got onto calls:

executed: BTO SPY 2020-Sep-09 350 Call @ 1.82 DAY

Were up 25% today but I held them as the market is still strong.

Are your Puts naked?

Long puts don't need collateral. Since he said "BTO" instead of "STO", naked or not is not applicable.

BTO = Buy to Open (open the position)

STO = Sell to Open

When selling calls, you want to hold the underlying, else you're naked. When selling puts your coverage is cash

All my positions are always posted. My Discord is open.If you read my post, I did not say I made money on this drop, but I did see it coming, however, I am bullish, so I am not going to flip a switch on a whim. Look at all my posts in my #updates channel the last 2-days. I have called this is a fake out and a rebound.

Think about this when you read a news article and they make a statement, what are this person's credentials? Since they are useless, go look at fundamental/technical analysis instead of media noise.

Edit: New TSLA position taken: executed: BTO TSLA 2020-Sep-11 490 Call @ 8.09 DAY

Interesting position. I like it.

It took me a bit of time to realize you can make money “out of the money” with options.

With options you make more money selling the option before expiry so the out of the money will have more theta value so you will likely get paid more. Also if theta is higher and the cost of the contract is low, you are getting more for premium (extrinsic) versus intrinsic value.

TSLA $490C expiring 9/11 now worth $0.65

Nice play

TSLA $490C expiring 9/11 now worth $0.50 at close

So I lost $800 per contract but I made $30,000 per contract on my last trade so does it affect me? Shit happens. You take your losses. Market is still fine. I don't know if your nice play comment was supposed to be some smart alec reddit comment however if it was then continue being someone's personal slave. Thanks.

I really wish I knew enough about the stock market to understand your comment, but no matter how much I try, it still seems to convoluted and messy.

Is there a good resource out there to help people like me who are an absolute beginner?

These people are gambling and these comments are full of survivorship bias. Just passive invest, don't try to time it.

This article is mostly about options trading. If you take a basic options course and learn about greeks, some of it will start to make sense. Tasty Trade and TD Ameritrade offer free courses, though you might need to open an account for the latter.

Just in case anyone thinks of signing up for TDA, they have terrible software and they are also being merged into Schwab soon. I would look elsewhere.

Tasty trade can teach you a lot of the basics... Start slow (please) with money you're prepared to lose

You mean like investopedia?

So much of the financial "froth" could be elimanated by a law that taxed taking speculative positions in a punitive way and relatively rewarded buying and holding. If you compare the function of the market 100 years ago (owning significant stock mean't you had some degree of interest in the long term prospects of a company) versus today you can see the problem. Financialization of the economy actually doesn't produce much. It mostly transfers money from productive uses or away from more equitably income distribution in the population to speculators and irresponsible parties like Softbank and the harebrained ideas they invested in.

> taking speculative positions

It's hard to define what a speculative position is. Incentivizing buying and holding would just be intentionally make markets illiquid, which a. let's bigger players take larger profits more easily and b. leads to inefficient pricing

There is no reason why efficient pricing of all assets is socially desirable. Efficient pricing may have a cost. Housing is a relatively illiquid market on a local basis. The way to make it more liquid would be to have people buy and sell houses more frequently. Sure we might have a finer grained understanding of what a given house is "really" worth at any given moment but what good is there in that information? Likewise what social good (as opposed to good for the individual speculator) is there in shares of companies changing hands easily and frequently? Liquidity has a cost. The cost of liquidity is instability (volatility) and short termism. Fractional ownership of a company should be a long term undertaking. Not a speculative position. Otherwise how can good corporate governance be incentivized if owners can jump ship at a moment's notice with essentially no cost? How can debacles like Boeing engineering failures be avoided when all that matters is quarterly appearances?

Respectfully, I don't really feel like engaging with this conversation because it seems like we don't have the same basic starting points.

> The cost of liquidity is instability (volatility)

Just research it. Liquidity doesn't cause volatility, it's the opposite effect: illiquid markets lead the real underlying price to be largely different than the market price, leading to massive jumps.

As a thought experiment ask yourself why should it be easier to buy or sell fractional ownership of a company than a house or a car? Does that not incentivize not taking responsibility for the long term prospects of a company or understanding its business? What is the proper role of owners? What is the purpose of public trading? Is liquidity and efficiency an end unto its own?

Something like if you hold for at least a year, you get about 50% off the taxes?

Sadly that doesn't work for state income taxes in Oregon. They make no distinction between short term and long term gains. And you hit a 9% tax rate at income of $8,900.

Why is the froth/volatility bad though? You're not forced to participate and there are other investments for every risk level.

Froth and volatility are bad if they result in a less good allocation of resources in a Pareto sense. So if net utility in society decreases because some hedge funders are skimming the financial froth rather than putting resources to productive use then yeah that is bad.

For example there may be a student who is good at Math who could become a PhD physicist or material scientist and develop new materials for medical application. Instead he is drawn to wall street and spends his career optimising "high frequency trading" algorithms and pricing options. Maybe he makes more money as an individual but society as a whole is worse off from the misallocation of resources.

Basically a financial sector that rewards non-productive work exerts a negative externality on society, particularly in terms of opportunity costs and mis-allocation of human resources.

Isn't the lower tax rate on long-term capital gains exactly that?

> basically been free money for the last several months

Can you please not say stuff like that?

You're only calling it "free money" with the benefit of hindsight. And even then, it's still not "free", since you got a big 5% drop in one day.

People are just ill-informed about markets in general, comments like this make it pretty obvious.

"Free money" in a publicly traded market, yeah sure. "Anyone could have seen that fall coming", again, yeah sure.


'Can you please not confidently project what is at best hindsight-bias? This isn't a palto alto meetup aka signalling-fest'

But are their influence really more than retail investors ? Especially the ones from wallstreetbets / robinhood who came after / during the pandemic. At the end of the day all these people only bought options, nothing special.

I think it's safe to say that SoftBank was the trigger, by buying up the meme stocks that are relatively safe bets (Tesla, Amazon, etc), which WSB/Robinhood traders had their eyes on. The Tesla/Amazon traders amplified the signal, and their gains posted everywhere on Twitter, Insta, Reddit, etc. encouraged people to plow more money into the markets, especially in the direction of the meme stocks. Then as S&P started gaining, people noticed and just continued plowing money into the index. Which is why outside of Nasdaq, tech and S&P, there are hardly any movements in the market.

Buying options is still visibility, encouraging would-be traders to register on Robinhood and buy some amount of stock. For instance, my old college mate, a current PhD candidate, joined Robinhood and started trading around March. And of course, when he asked me for recommendations, I told him to play safe and go with the S&P stocks and resilient tech stocks. Then of course, he went full on WSB mode, and now he's "eating tendies while his wife is hanging out with her boyfriend".

I wouldn't put both Tesla and Amazon in the category of "Meme stocks that are relatively safe bets".

Amazon's not a meme, and Tesla's not a safe bet.

They both have in common that they are a technology stock with a familiar name, particularly ones that have had a very good stock market run in the last 10 years.

I agree though that due to what appears to be a bubble, these investments aren't that safe at the moment. It appears that these type of stocks have benefited recently by retail investors entering the market and piling in. ( https://thehill.com/policy/finance/510796-are-trading-apps-p... -- though, as the article points out, the Robinhood investor bubble is smaller than the effect of the Fed's QE etc. ) Under normal valuation, Tesla at this point I don't think would be considered "speculative" -- risky, but not as risky as some. But a P/E ratio of 1000+ even after this recent dip is IMHO pretty difficult to justify.

r/wallstreetbets is pretty unreal to me -- many people are focusing on high-risk options on these heavily valued stocks, and (by the comments) appear to be putting a lot of their "eggs" in only one or two "baskets", to use the popular phrase. It's not ending well for some of them, judging from some of the posts.

Tesla was growing before the crisis. Largely due to their Chinese gigafactory, which is a pretty big deal, since it shows a.) They will be in the good books of China for the time being. Till their eventual tech ripoff at least. b.) They have the potential to gain the same brand value that Apple accrued in China. Definitely don't deserve the current valuation though - I was lucky I happened to be holding some when we bought some after buying my first car.

The kind of options plays on WSB are insane tbh. I don't mind putting my eggs in one or two baskets, as long as they are stocks of steady companies, but options? No way.

I doubt they care much about the "eventual ripoff". Their strategy is to out-pace competitors through innovation. It is the same reason they open sourced almost all their patents.

I guess so, you're right. I didn't know their patents were open-sourced.

And the feedback loop for loss porn doesn't help either. Oops, I lost 10k, can I have karma pls¿

From a value perspective, apart from the price, they do have everything one would expect from a "quality" firm - significant brand moats, strong management, recent developments, etc.

What does “gamma” mean in this context?

It comes from the Black-Scholes equation for pricing derivatives. It's a partial differential equation that's defined in terms of the price of the derivative, the price of the underlying asset, volatility, and time.

From the equation, you can derive a series of rates of change one one variable with respect to another, often colloquially known as "the greeks", since they're all denoted with greek letters.

The first one to know is delta. It's the rate of change in the option's price with respect to the underlying asset's price.

Delta generally follows a curve, not a straight line. Gamma is the rate at which delta changes with respect to the underlying asset's price.

The reason why these are a big deal are because options traders often try to remain "delta-neutral" - they want the overall delta of their options portfolio to remain close to zero, which limits the effect of fluctuations in the underlying asset's price on the overall value of their portfolio. But that's a constant balancing act, because changes in the underlying asset price also change the delta of their position. A low gamma means that it changes slowly, and it's easy to keep things balanced. A high gamma means that they're sitting on an unstable equilibrium, and they're going to have to buy and sell more aggressively in order to maintain their position.

why do they want delta neutral, if you are buying option don't you want delta as high as possible and if you are selling option don't you want delta as low as possible ?

I think the GP misspoke when they said "option traders". Market makers want to be delta-neutral -- they don't want to care whether the underlying goes up or down, since they buy and sell both puts and calls and profit from the bid/ask spread.

Your description is right(-ish) for directional traders.

The basic mechanism of this, in my understanding is:

    1.  Buy underlying shares.
    2.  Buy calls on those shares.
    3.  Market makers who sell you those calls have to buy shares in the underlying stock to hedge (they run balanced books)
    4.  Demand for stock rises, stock price and calls increase in value
    5.  Use proceeds to buy more stock and options. Rinse, repeat.
The "gamma squeeze" (which is how much the option value changes in relation to underlying stock price) refers to the part where options sellers have to hedge by buying stock. Essentially, the very act of buying calls in volume increases their value, allowing you to buy more and drive the price upwards.

You forgot "6. Sell all underlying shares and calls before everything collapses". At some point, market makers shouldn't be able to sell you more calls. That's when you dump.

And, of course, when you dump, market makers need to also dump to reduce their exposure.

There's a potential for some seriously crazy non-linear feedback.

Ok, for all of you out there who think this is so illegal... you’re confusing immoral vs illegal. Anyone who buys large amounts of a financial instrument is knowingly influencing the market price. Some folks on here have mentioned Berkshire Hathaway, who is notably trying to NOT inflate prices while buying; the mere knowledge that they are tends to send prices higher. What SoftBank did is probably wrong, but it’s not illegal. The markers are a casino, it’s all betting prices go one way or the other. SoftBank doubled down on their purchases through options, which is legal. The point up for debate is intent, if they intended to manipulate prices, they are criminals. But when has anyone ever proved intent alone? That’s not an avenue to enforce market regulations, that just leads to thought police. What we all need to accept, is that no matter what financial transaction rules are in place, someone, somewhere will find a way to manipulate them to their advantage without overtly breaking them. It has always been this way, and always will. The smart win, and the fools are quickly parted from their money. Stop bitching, and stop buying Tesla at a 1200 PE. Xoxo xoxo - me

Regardless of intent, or if manipulation is happening in this case, or whether or not it is currently legal, this type of activity potentially allows for someone to artificially manipulate prices to their advantage at the cost of other market participants. Hence, why shouldn't we make such activity illegal for this reason alone? Why leave a now obvious loophole in our financial system, that could be potentially be abused? We made wash sales trading illegal. Why shouldn't this pattern of activity also be made illegal - when wash sales trading is deemed illegal?

If your argument is abuse will happen anyways - why even bother having any financial laws?

This is a crime, right?

Why would buying derivatives be a crime? That doesn’t make any sense.

If I buy 10 calls, the MM has to hedge. If SoftBank buys 100,000 calls, they just hedge more. How do you figure this is in any way remotely illegal?

Buying shares also raises the price of shares, should that be illegal too?

I understand your surprise here, but just to note: lay people intuitively think that "stock manipulation" is a crime. This is because their retirement savings relies on stock prices being fairly stable due to attachment to actual business value. Intuitively, people that put that system at risk are doing something wrong, and things that are wrong should potentially be illegal.

Essentially: most people intuitively think the stock market should be more heavily regulated than it actually is.

This is why I wish I had a pension instead of a 401k. Too bad that the people who still offer pensions are also paying a lot less on average (usually due to being government related) than companies offering 401ks do.

It depends on the context? Wash trades, for example, use only basic primitives but are regulated and we have seen SEC action over them.

Wash Trades: https://en.m.wikipedia.org/wiki/Wash_trade

"investor simultaneously sells and buys the same financial instruments to create misleading, artificial activity"

Well, market manipulation is illegal. I don't know enough about finance to know if this sort of activity is market manipulation or not though.

There's a bunch of examples here;


The US Securities Exchange Act defines market manipulation as "transactions which create an artificial price or maintain an artificial price for a tradable security".

> I don’t know enough...

Well, I do.

Buying and holding call options is not market manipulation, full stop. Please provide an example of someone being penalized by the SEC for buying and holding call options without using insider information. You won’t, because buying call options is not market manipulation.

Is it market manipulation when Buffett announces BH bought shares of a company and then the shares skyrocket?

Legally it depends on intent, which would be very hard to prove. Unless senior execs wrote emails saying “let’s buy option to manipulate the market” or colluded with other market participants, it is safe. However, it is not “always” safe.


I never claimed someone was ever penalized by the SEC for buying and holding call options, just that buying derivatives can be a crime if it's done for the purpose of market manipulation.

Part of the difference here is that BH is legally obligated to disclose when they buy shares of companies. At least, they are under certain circumstances, which I can’t remember off the top of my head. You can’t punish someone for something they’re legally obligated to do, because one can’t be legally obligated to commit a crime.

True, they are obligated to disclose their positions in a quarterly report.

That doesn’t change the fact that buying and holding options is not illegal...

Who cares if it is or isn't legal currently.

Lots of things where once legal, which the majority of society came to deem as bad (slavery, child labor) - which we then came to make illegal.

But the problem here isn't just simply buying stocks, or holding options. It's the repeated process of buying both a stock and its options at the same time by a whale - and it seemingly does allow for manipulation of stock price. As so, why shouldn't such a pattern of activity be made illegal?

Eventually the “manipulation” will push the price to a point where other actors sell, and then more people sell and the price corrects (see yesterday and today’s charts). Buying equities and options in large amounts is not market manipulation. There are lots of institutional actors placing large orders all the time.

>Eventually the “manipulation” will push the price to a point where other actors sell, and then more people sell and the price corrects (see yesterday and today’s charts).

Not sure how this statement helps your argument. The same happens in pump and dumps. The people who artificially manipulated the price up in the first place sell in large, duping the latecomers out of their money, and the price corrects.

>Buying equities and options in large amounts is not market manipulation.

No it is not, but this isn't a simple matter of buying of equities and options. It's a pattern of repeatedly buying equities and options by one large party in a way which allows for potential manipulation. As so, even if such a pattern isn't illegal now, why shouldn't such a pattern be made illegal? Wash trades used to be legal before 1936, but we made them illegal for similar reasons...

> It's a pattern of repeatedly buying equities and options by one large party in a way which allows for potential manipulation.

Please explain how SoftBank was potentially manipulating markets illegally by buying shares and calls, I’m curious.




Now please explain why this activity shouldn't be made illegal, when wash trading is deemed illegal. Wash trading after all, involves buying stocks... yet it's illegal.

Wash trading is buying and selling to yourself to create the illusion of volume, which is fraudulent. Buying OTM call options on an exchange does nothing to distort volume or manipulate price, it’s simply part of price discovery, just like buying or selling shares.

This scenario is not just "buying OTM call options", just like wash trading is not just "buying stock". This is the problem with your argument. You oversimplify the issue.

Wash trading is a way of buying/selling stock, (namely by one party at the same time), which can be abused to manipulate prices. Just like what is happening here is a way of buying stock and its options (namely by one party at the same time, repeatedly), which can be abused to manipulate prices.

Ought vs Is, my friend. You are making a moral/ethical claim about how the world OUGHT be while he is making the distinction about how the world IS today.

Some patterns are illegal by the way. However proof is still quite difficult to come by.

For instance, it's market manipulation to place large orders continuously and then cancel those orders continuously.

It's also market manipulation to place both LARGE buy and SELL orders at the same time in order to fake volume for a particular stock.

However me as an individual or private entity can at any time go place an a LARGE as fuck order for what ever I want.

In fact if you look back and study old stock floors ect. traders started to learn what the people at the large banks/intuitions looked like. When they saw them walk up with their stack of PHYSICAL orders, they'd try and step in front of them because they knew the market was about to move as a large order was about to be placed.

>Buying shares also raises the price of shares

No it doesn't.

Shares prices are falling today. People are selling. That means people are also buying. Every transaction has a buyer and a seller. Yet prices still fall.

Let me rephrase: Buying a huge volume of shares equivalent to SoftBanks option delta exposure would raise the share price of whatever underlying the options were for.

What he's saying is that there is only so much liquidity at a given price point.

Given low enough liquidity even tiny volume purchases relative to the liquidity can increase the price of a share.

>This is a crime, right?

Good question.

On one hand, it's purely mechanical; it just works that way. On the other, it's hard to imagine doing it deliberately wouldn't be considered manipulation.

The purpose of buying call options is to to make a profit. It's hard to imagine that buying them and doing nothing other than buying them could be considered illegal. That's not manipulating the system any more than Buffet manipulates the system every time he buys stock (by also sending out the message that he thinks the stock is worth buying, just because he bought it without even needing to say anything about it).

The sheer magnitude of it is what makes it seem like a pump and dump, however. The mechanics are broadly similar: send a signal that should cause people to bid up securities you own, then drop the bottom out by selling when the price goes up enough.

I’m not saying it’s illegal per se, but financial misdeeds don’t tend to get punished in the US, unless the victims are wealthy enough. See, for instance, the global financial crisis of 2008 vs Bernie Madoff.

>It's hard to imagine that buying them and doing nothing other than buying them could be considered illegal.

In the purest sense, sure.

I bet there will be more to this story, and I think if insiders or associated holding companies are found to be doing so, it's at least a grey area.

It would come down to intent. If the intent of buying a lot of options is, "I want a big position," or, "I want to hedge a big position," sure, that's probably fine. If the intent is, "I want to influence the market in some way," not so much.

As long as there is no inside information, buying or selling should be perfectly legal, if done inside the legal limits.

That last "if" is the crux. Intent is a huge factor in what is and is not considered legal market behavior. For example, consider banging the close. Buying lots of futures at a certain time of day is not illegal in and of itself. But it's quite illegal if regulators show that your purpose in doing so was to influence the settlement price of some other asset in which you hold a position.

Wouldn't banging the close be priced into the market?

Can you leverage buying a lot of calls or puts into making profit for yourself?

How are they going to prove intent?

It tends to involve things like subpoenas and depositions.

Trading on inside information shouldn't be illegal either, it actually benefits even market participants who don’t have access to it.

> it actually benefits even market participants who don’t have access to it


Insider trading drives prices closer to fair value. A CEO dumping shares before reporting a bad quarter saved money for unknowing purchasers buying the stock. If the CEO buys shares before reporting a huge new government contract, they get a better price for clueless sellers.

Now public companies could still restrict CEOs and other employees from profiting from insider knowledge. It could even be as simple as requiring employees to file disclosure filings before any stock transaction to level thevplayomg field.

I think he means that in technical analysis, they trade based on price action. Thus, insider trading gives you a peek into something that the fundamentals haven’t revealed yet (the price will change to reflect the secret news).

Can't imagine any way one can prove intent one way or another here..

I don't see how. The people buying the shares are not related to the market makers so as far as I can tell there's nothing illegal about that.

Also, gamma has a kind of self-reinforcing feedback loop. When the options are initially way OTM the market makers only need to hedge with a small amount of the underlying. But as the price runs closer to the option strikes the delta impact of a given move becomes larger and larger, so MMs have to hedge with more and more of the underlying, which can itself push the price farther in the same direction.

And then the options expire, MMs unwind their hedges and gamma comes back down. There’s no infinite gamma trick

Yes, obviously the reflexivity does not proceed ad infinitum, but these dynamics are often responsible for extremely violent moves in the short term. The effects can be even more pronounced right before expiration.


Indeed, gamma squeezes can produce lots of volatility near OpEx. And call rolling can just push the gamma further out for another squeeze come the next OpEx.

So that would imply that for Softbank, high gamma stocks are desirable for this scheme? As in they want the maximum 'reaction' from each purchase they make?

Also, this works in reverse right? So Softbank is literally just creating a stock market bubble since the price rises are not built on anything fundamental?

I think how much of a bubble depends on the specifics of the stocks they're doing this with.

If the stocks they're choosing have high gamma because there's a lot of short interest, then some of this increase could be shorts transferring equity to longs when they cover, which wouldn't be a bubble per say.

Historically low interest rates could also fuel this directly by providing extremely low interest capital and indirectly by pushing investors in general to chase yields in equities. That would be more bubble-like, but it also applies to other asset classes, and it's ultimately a function of central bank policy.

gamma is the derivative of how much option values change in relation to underlying stock price.

To clarify it’s actually the second derivative of the options price w.r.t the underlying price, whereas “delta” is the first derivative of the same. (So gamma is the rate of change of delay w.r.t the options price since delta is not constant)

Sorry, I had a few typos and can’t edit.

Gamma is the rate of change of delta w.r.t the underlying price. For example OTM calls have a delta close to 0. As the underlying price increases the delta will increase. When the underlying price reaches the call strike price (ATM) the delta will typically be 0.5. As the underlying price continues to rise and the call becomes deep ITM the delta will approach 1.0.

In the context of options, delta is the change in the option price divided by the change in the price of the underlying stock (i.e., the first derivative w.r.t. the stock price).

Gamma is how much the delta changes for a change in the underlying stock (i.e., the second derivative w.r.t. the stock price).

Market makers hedge their options positions by buying or selling the underlying stock so that they have no exposure to moves in the underlying stock (they are "delta neutral"). So if the delta at the current stock price is 0.50 and the market maker is short 100 call options, he will buy 50 shares. But options are non-linear and the delta changes with the stock price (again, this is what gamma is). If the stock moves up so that the delta increases to 0.60, the market maker will need to buy another 10 shares so that he owns 60 shares and is again delta neutral.

In this way, buying begets more buying and this is what people mean when they talk about a gamma "meltup".

So if the delta at the current stock price is 0.50 and the market maker is short 100 call options, he will buy 50 shares.

If he does that he won't remain a market maker for long.

A single call option almost always is for 100 shares of the stock. So being short 100 call options, delta 0.5, would require being long 5000 shares to be hedged.

I'm sure you knew that, I'm just pointing out your typo for other less-experienced people here.

Yes, I was ignoring the fact that an options contract represents 100 shares as it needless complicates the point I was trying to make.

It’s the second derivative of option price w.r.t asset price.

The first derivative “delta” is the speed at which the option price moves w.r.t the asset price. If the option is “deep in the money”, it’s almost 1 - any move is the asset price is essentially also the same move in the option price. If it’s deep out of the money, it is almost 0 - the probability of the option being worth anything is almost zero, so it’s value doesn’t change with price moves. It is 0.5 at the money (but i don’t have a one line intuitive explanation)

Gamma is the acceleration of option price with respect to the asset price. If the asset price grows, how will the delta (speed) change?


Works for me? Maybe they have some terrible geosniffing.

It's something odd, on that site I've follow some links (all on domain) then used the browser back button and land on a 404

Options are crucial for price discovery. naturally their value goes up in the face of uncertainty. As a mm you don’t have to buy the underlying to cover short calls, you can also buy less far out calls, as long as the black scholes price for the spread is favorable.

A particular MM might lay off the call risk by purchasing a call, but all they're doing is passing the risk on to a different MM.

There aren't that many natural vol sellers (hedge funds, mostly? and implicitly the Fed), so MMs as a group have the function of converting implied vol into realized vol via their delta hedging activities.

shares are just long dated calls. There are plenty of routine covered call writers running the wheel from wealth managers to boomers like my dad.

But you are right that to you need to have the capital to face early assignment if you are short and the capital to take delivery if you are long volatility and liquidity is low relatively.

As a mm you don’t have to buy the underlying to cover short calls

Yes you're absolutely right.

The beauty of being a market maker is you only need to hedge across the entirely of your exposure to a particular equity. The more different options you sell on a particular equity, the easier it becomes to hedge your net exposure.

>The financial system is far more broken than people realize.

>I’m guilty of taking advantage of this myself, but it’s basically been free money for the last several months. Up until yesterday at least...

I choose not to participate. It's broken as all fuck and I'm not going to be a part of it.

I've been making a solid salary selling near the money 0.3 delta S&P futures options (puts) 3X weekly. Let's see if the party continues :)

How did this strategy fare during the last couple days though? Wouldn't weeks or months of profit have been wiped out? Though I guess if it's done for a long enough time it's probably ok

Yeah I’d built up a sufficient buffer, and suspected a correction was coming as the VIX and S&P have been rising together for the last few days. I bought puts 2 days ago instead of selling them. Even if I hadn’t, the last few days would have taken out 25% of my strategy gains YTD. However as a put seller I’d have rolled them down and out, repeatedly, until they expire OTM.

If you lack the cojones for such a mad strategy haha, you can always sell put credit spreads to define your risk at the cost of reducing your return.

So what popped the bubble?

I think it’s interesting it popped 24 hours prior to this story, like reporters reaching out for comment triggered a change of strategy. Pure speculation of course, the holiday weekend tends to cause sell offs as well.

I am genuinely curious about your response but I can’t understand it. Can you please translate into plain English?

Assuming they actually have this ability to pump the markets, what stops them from doing it over and over again infinitely? Market makers NEED to hedge right? Would people catch on and they couldn't sell their inflated calls at the end of the ride?

Valuation? At some point the other holders of TSLA & GAFA sell.

That will be illegal because that's market manipulation.

So you can do it once? Or do you believe the SEC is going to come down on SoftBank here?

I do not understand why market makers "have" to buy for OTM option volumes.

Sorry I am a stocks noob but losing blood these past two days. Any help is appreciated.

I'm still learning too, but the short answer is that the seller of the options needs to manage their risk if the option is exercised. If you sell a call, you are promising to provide a stock on demand at a particular price. The most straightforward way to ensure that you are able to sell a stock in the future is to be holding the stock now. If you don't already have enough of the stock in your portfolio, you need to buy it.

A longer but excellent answer is here: https://youtu.be/9eDqmOPSs9Y?t=908

>but it’s basically been free money for the last several months.

What does that even mean... lol

Rise != 'free money'.

Buying monthlies / leaps has been free money the past few months.

Only with the benefit of hindsight. I made significant money the past few months trading, but I would be a fool if I claimed it wasn’t without significant financial risk.

This is the correct and sane response. Otherwise, everyone thinks they are financial geniuses, until they lose their shirts.

The WSJ article on the topic has a little more specific information:

Japan’s SoftBank, which bought options tied to around $50 billion worth of individual tech stocks. ... Regulatory filings show SoftBank bought nearly $4 billion of shares in tech giants such as Amazon.com Inc., Microsoft Corp. and Netflix Inc. this spring, plus a stake in Tesla. Not included in those disclosures is the massive options trade, which is built to pay off if the stock market rises to a certain level and then lock in gains, the people said.

SoftBank bought a roughly equal amount of call options tied to the underlying shares it bought, as well as on other names, according to people familiar with the matter. It also sold call options at far higher prices. This allows SoftBank to profit from a near-term run-up in stocks and then reap those profits by unloading its position to willing counterparties.

So they are buying stock in tech companies, then compounding the bet that the stock price will go up by buying an equal dollar amount (in this case, corresponding to 11x the number of shares) of Out-of-The-Money calls. Then they wait for the price of the stock to go up, fueled in part by the Market Makers need to buy stock to hedge their exposure to the calls that SoftBank bought.

Once it's gone up, they then sell (presumably In-The-Money but at a greater strike price than they paid?) calls for more than they paid for the initial OTM calls. When those calls are excercised (because they are ITM) they sell the stock for a profit (price increase plus the premium of the covered call). Because they are buying large enough amounts of calls to cause the Market Makers to buy enough to increase the price of the stock, their strategy is more likely to work than it would be for normal investor.

One big unanswered question: do they sell their OTM calls before expiration after they increase in value? Or are they able to exercise them once they are ITM? I'd guess their goal is to exercise, since that helps them put more pressure on the MM's to hedge and while also letting them continue the strategy.

The reason this question matters is it affects how much stock is going to flood the market once SoftBank stops buying calls. SoftBank will presumably sell the relatively small number of billions of dollars of tech stocks they are holding at the right time, since they know when they'll stop buying calls.

Once the number of outstanding calls drops, then next thing that will happen is that the MM's will presumably sell their enormous hedge, causing the prices to drop rapidly. But obviously, the MM's don't want the price to drop until they have completed their sell off. Are they allowed to use the same strategy that SoftBank is using? That is, can they pre-sell a sufficient amount of (possibly discounted) ITM calls so that they can unload their hedge without affecting the price they receive? Or do they sell them on the market? Is there information available about what the MM's are holding as hedges?

They must have not poured any money into Slack calls.

Isn't this considered market manipulation?

Time to load on up SQQQ!

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