Can anyone interpret? 'dominant options-gamma'

Investing Strategies Options - You Make the Call
21

Could be a multitude of things. Maybe volatility changed. Maybe it’s the summer doldrums with many on wall street out on vacation. Maybe it’s a harbinger of something big about to happen. Maybe everyone is slowing their actions while waiting to see what the fed does. Maybe people are reducing exposure because they think an AI/DC bust may come soon. Maybe all, some, or none of these things.

Maybe what was “working” has stopped “working”?

Perhaps similarly naive as the person who buys 20-year term life insurance when their child is born and never uses it.

22

Yes!!! Three times yes. The same principle as gambling casinos. The odds are skewed in favor of the house, what is called the vigorish.

No, they are gamblers who hope to make a profit. Are movie goers “naive market participants who are there to provide steady income???” No they are there for their amusement. This is how all economic transactions happen, one side gets money, the other some form of enjoyment or profit.

The Captain

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23

If you value options based on the directional movement of the underlying, then you might have this view.

But a large group of professional options traders value options a different way, based on volatility per se, with much, much less consideration for directional movements.

The volatility alone has value, regardless of the directional movement of the stock up or down.

This value is demonstrated in the theory behind the Black-Scholes option pricing formula and related approaches (which was deemed important enough to be recognized with a Nobel prize in economics).

Because volatility per se has value, professional options traders will be happy to buy your options and earn a living and support the options market with liquidity as market makers and run big businesses doing so.

It would be wrong to think that an option seller has any kind of inherent advantage over an option buyer, or use analogies like house versus gambler in a casino without understanding why volatility per se has value.

While it’s fine to sell options, don’t think that the party buying your options is not making money.

They are making money and they wouldn’t be in the (large) business of trading options if it was not profitable.

Here’s one article that provides some explanation:

The stock was wildly trading in a range and our delta hedging activity in that period had us repeatedly buying the stock as it made its way down and selling stock as it came back to the high end of its range. Over our smorgasbord, the broker started to praise us about our prophetic Nokia stock trading. We were shocked at his uninformed statement – even though we had purchased our Nokia options position via the same broker, it became obvious that our Swedish derivative salesman had skipped over the section about dynamic delta hedging during his training program.

Therefore, as the stock moves down your rebalancing activity has you buying stock, and as the stock moves up you are selling stock – continuously buying low, selling high, which makes your stockbroker think you are the Oracle of Nokia.

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The sheer lack of understanding is stunning. You are not casino… The casino is the market makers not you. You are merely a price taker when you sell the option, even if you set the limit price.

You as a seller providing a service and a buyer is doing it for amusement… this is full of hubris.

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25

Repeating how ignorant I am helps nobody. Try something constructive, like.

Accepting the casino model is a step in the right direction!

Market makers set option prices which have to be between the market bid/ask spread and which sets the calls’ vigorish. The key is the option’s Delta.

According to theory Option delta is determined using mathematical pricing models like Black-Scholes, where it represents the partial derivative of the option price with respect to the underlying asset’s price. Computer algorithms calculate it dynamically in real time using key inputs: the underlying stock price, strike price, time to expiration, risk-free interest rate, and implied volatility (Google AI). Unfortunately Black-Scholes results seldom if ever match market price.

Users on platforms like Quant StackExchange generally agree that the Black-Scholes model seldom matches actual market prices. This happens because the model relies on strict theoretical assumptions that do not reflect real-world trading conditions (Google AI).

So much for theory! It must be the market makers who come up with the Deltas. It is the options’ pricing that determines whether buying or selling call options is a winning or losing proposition. But there is a problem,

  • Market makers have the math but not the hardware for trading
  • The CBOE does the clearing but doesn’t trade
  • Trading happens on the stock exchange but the exchange doesn’t put up the money
  • The casino is not a physical establishment, it’s a virtual construct with buyers and sellers who put up the money
  • In this virtual casino setup one group must be the gamblers and the other the house

The economy says that supply and demand determines price which implies that supply and demand are equivalent opposites. Nothing could be further from the truth, you cannot buy what does not exist, at least as a promise. Why the detour?

  • Market makers have to set option prices high enough for sellers to enter the market. Trades can only happen when there are willing sellers. No amount of want or demand creates supply until the price is right.
  • Of course the opposite is also true and the bid-ask spread closes the trades

GoogleAI:

According to data from the Options Industry Council and FINRA, only about 7% of all options contracts are ever exercised and assigned. [1, 2]

These odds quite similar to casino games and lotteries, many small bets and a few large payouts. Why is this important? Because loosing a buck is not a big deal but making hundred to one is appealing enough to keep gamblers hooked.

Market makers job is to keep markets alive, to keep sellers selling so that buyers can buy. It’s in the name, Market Makers!

Maybe I should thank you for calling me ignorant. I’ve been trading options for a very long time, improving bit by bit as I added tools to find the best trades. I don’t recall when the casino notion came to mind, it just seemed intuitive. This is the first time I worked out why it fits. Thanks!

The Captain

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26

Market makers don’t make money that way.

They trade volatility.

Retail trades on direction.

This is a directional argument and is meaningless for volatility trading.

Professional option traders can and do trade on the value of volatility.

Volatility has value, you are selling it.

27

I wasn’t referring to market makers but to call option buyers.

I confess ignorance about volatility trading. Let’s see what AI comes up with:

Volatility trading is a specialized strategy where market participants speculate on the magnitude of price swings in an asset rather than its actual direction. Traders use instruments like options, futures, and indices—such as the Chicago Board Options Exchange’s Volatility Index (VIX)—to profit from changes in market fear, uncertainty, and expected movement. [1, 2, 3, 4]

Key Concepts and Metrics

  • Implied Volatility (IV): The market’s forecast of future price variation, derived directly from an option’s current price.
  • Historical Volatility (HV): A statistical measure of how much an asset’s price actually fluctuated over a past window of time.
  • The VIX Index: Often called the “fear gauge,” it measures expected 30-day volatility for the U.S. S&P 500 market.
  • Mean Reversion: The core tendency for volatility levels to cycle between extremes and return to a long-term average over time. [1, 2, 3]

Common Volatility Strategies

  • Long Volatility: Buying options or volatility-linked ETPs, profiting when market panic or sharp directional moves cause volatility spikes. [1, 2, 3]
  • Short Volatility: Selling options or premium during calm markets, aiming to collect income as asset prices stabilize and volatility drifts lower. [1, 2, 3, 4]
  • Straddles and Strangles: Options strategies designed to profit from a massive price move in either direction while remaining neutral on overall market direction. [1, 2, 3, 4]

Indeed the options market is complex. That is why I really enjoyed studying

It could well be I’m selling volatility but I don’t see how that affects my strategy. Maybe you can explain. Please don’t say because someone else is making money. Of course other people make money using other strategies.

The Captain

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28

You are funny…

This is why I keep saying your understanding is wrong. MM set bid-ask. They are not operating on your bid-ask. As usual you post lot of meaningless, google stuff.

Let me stop here, because clearly we are at different levels of understanding of market. Why waste our energies.

Good luck with your trading.

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Market makers buy calls.

They will buy many call options because they can make money on them by buying the volatility that you and others are selling.

If you are selling options then you are selling volatility.

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Market Makers are just a cog in the machinery as far as I’m concerned. Their job is to make markets work. Whether they buy or sell options, whether they make or loose money is totally irrelevant to my option trading process. I ignore it entirely. What I care about is how much money I’m making. and protecting my principal.

How does that impact my returns?

The Captain

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31

I didn’t say anything about your returns.

You wrote that many options expire worthless and you suggested call buyers are gamblers.

I explained how option buyers, such as market makers, can consistently make money from volatility in a way that

  • does not depend on moneyness, and
  • is not gambling

It’s based on volatility, not directionality of stock price movements.

It doesn’t mean a retail trader can’t make money selling options.

But it does mean there is another way to make money by buying options that is based on volatility and not directionality.

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32

Agree. Option Volatility and Pricing teaches that there are many successful strategies for trading options but I’m talking only about selling covered calls for income. Maybe that was not clear early on.

The Captain

33

Well… if you are selling volatility, insurance, and calling the buyers as “gamblers”… they don’t align.

If buyer of “volatility” is a gambler, so is the seller… If you don’t understand how volatility impacts option pricing and thus your return…

These are circular argument being made.

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