11-27-2020, 11:56 AM
Why you should be buying on Friday.
<!-- SC_OFF --><div class="md"><p>As of Wednesday there was a total option derivative exposure of 1B set to expire tomorrow. </p> <p>This number might seem small when compared to just general OI and volume of long/shorts, but options fill a specific need as hedges outside of directional bets. To understand the impact of large option overhangs on markets you will need to understand the sellers/buyers of options and the role of the Greeks and market makers in the option market. </p> <p>Let's start with what is an option. An option, in traditional equities, is a contract to buy or sell a specific quanity of an equity at a certain day and price. Example I buy a call option (implying you believe the price will go up) for btc at a strike of 15k on 11/27. Now if btc is at 16k on 11/27 I have the option to take delivery of btc at 15k that day. Essentially I have made 1k since it was 16k at settle and I take delivery at 15k. This part is important - whoever sells you an option and you take delivery they have to either buy the spot to deliver it to you, or they deliver it to you from their own position. </p> <p>Options aren't typically used as income streams, despite what you see on <a href="/r/wsb">r/wsb</a>, they are used as hedges for buyers and small premium generators for sellers.</p> <p>So what we see in the options btc market for 11/27 in BTC is a few things:</p> <p>Majority of Puts (an option hedge against downside movement of an equity) are underwater. These puts being underwater are good for the market makers that sold these contracts. Options have values such as theta/delta which we will focus on there are 2. </p> <p>I know there are others, but let's take these 2 as they are important from a buyer and seller perspective. Theta is a time value, essentially its the value daily you pay to hold the contract to the seller. The closer to exp the bigger theta premium is paid to the option seller. The second aspect of the option is delta. Delta is the % a price of the contract will move as it gets closer to the strike price. Basically the closer to the strike price that you buy an option the more expensive it will be. The longer you hold an option contract the more you pay the seller of that contract for that privelage. Delta and theta will cancel each other out as they approach the strike price.</p> <p>So if we play out the option book for 11/27. Puts sold at close to the strike price were expensive for the buyers, the sellers of these contracts have essentially made all their money off puts that were bought under 16k. On the call side the market makers do not want to have to sell their spot or buy spot to deliver to the call buyers above 16k up. This is where max pain comes in. Its essentially the point where the market makers screw the most amount of people. The have collected enough premiums to off set the assignment of any option.</p> <p>I haven't even gotten into gamma and how that plays in as market makers want to be delta neutral. High level - market makers will adjust theirs books based on the market. They will sell short if the are on the hook for puts or buy long if they are on the hook for calls.</p> <p>TLDR: Buy spot Friday we will be close to 16k. We will bounce as the market makers unwind their books. Dec is next big option expy so lookout.</p> </div><!-- SC_ON --> Kind Regards R
<!-- SC_OFF --><div class="md"><p>As of Wednesday there was a total option derivative exposure of 1B set to expire tomorrow. </p> <p>This number might seem small when compared to just general OI and volume of long/shorts, but options fill a specific need as hedges outside of directional bets. To understand the impact of large option overhangs on markets you will need to understand the sellers/buyers of options and the role of the Greeks and market makers in the option market. </p> <p>Let's start with what is an option. An option, in traditional equities, is a contract to buy or sell a specific quanity of an equity at a certain day and price. Example I buy a call option (implying you believe the price will go up) for btc at a strike of 15k on 11/27. Now if btc is at 16k on 11/27 I have the option to take delivery of btc at 15k that day. Essentially I have made 1k since it was 16k at settle and I take delivery at 15k. This part is important - whoever sells you an option and you take delivery they have to either buy the spot to deliver it to you, or they deliver it to you from their own position. </p> <p>Options aren't typically used as income streams, despite what you see on <a href="/r/wsb">r/wsb</a>, they are used as hedges for buyers and small premium generators for sellers.</p> <p>So what we see in the options btc market for 11/27 in BTC is a few things:</p> <p>Majority of Puts (an option hedge against downside movement of an equity) are underwater. These puts being underwater are good for the market makers that sold these contracts. Options have values such as theta/delta which we will focus on there are 2. </p> <p>I know there are others, but let's take these 2 as they are important from a buyer and seller perspective. Theta is a time value, essentially its the value daily you pay to hold the contract to the seller. The closer to exp the bigger theta premium is paid to the option seller. The second aspect of the option is delta. Delta is the % a price of the contract will move as it gets closer to the strike price. Basically the closer to the strike price that you buy an option the more expensive it will be. The longer you hold an option contract the more you pay the seller of that contract for that privelage. Delta and theta will cancel each other out as they approach the strike price.</p> <p>So if we play out the option book for 11/27. Puts sold at close to the strike price were expensive for the buyers, the sellers of these contracts have essentially made all their money off puts that were bought under 16k. On the call side the market makers do not want to have to sell their spot or buy spot to deliver to the call buyers above 16k up. This is where max pain comes in. Its essentially the point where the market makers screw the most amount of people. The have collected enough premiums to off set the assignment of any option.</p> <p>I haven't even gotten into gamma and how that plays in as market makers want to be delta neutral. High level - market makers will adjust theirs books based on the market. They will sell short if the are on the hook for puts or buy long if they are on the hook for calls.</p> <p>TLDR: Buy spot Friday we will be close to 16k. We will bounce as the market makers unwind their books. Dec is next big option expy so lookout.</p> </div><!-- SC_ON --> Kind Regards R