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Spectrum Pharmaceuticals, Inc. Message Board

  • west1909 west1909 May 26, 2012 10:50 AM Flag

    Some one bought 292 June $ 10.00 puts

    It looks like the bears think it will go down more.

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    • you forgot the MM (more experienced) who sold the puts think that it is not going below 10. Either you are short or an amateur.. which...

      • 2 Replies to thecomforter1919
      • "...you forgot the MM (more experienced) who sold the puts think that it is not going below 10."

        Such amateurish thinking pertaining to options. The MM has NO OPINION as to whether the stock is going below $10 or not. It is his JOB to sell the puts if someone wishes to buy them. Or to buy them if someone wishes to sell them.

        EITHER WAY, the MM will take a corresponding (stock) position to neutralize his risk in the option position. For example, if the MM SOLD the puts to the investor, then he at that moment becomes long the stock, so therefore the MM would sell short a corresponding number of shares to offset the risk.

        Numerical example: MM sells 100 puts to investor. Now short 100 puts. To offset, MM sells short 10,000 shares. Thus, when the stock price increases:

        Short puts increase in value.
        Short shares decrease in value.

        The above two positions neutralize.

        Similarly, if the MM buys puts, he would also buy shares so that, when the share price increases:

        Long puts decrease in value.
        Long shares increase in value.

        Neutralized once again.

        So the MM doesn't "think" one way or the other about where the pps is going. He doesn't care as long as his positions are balanced. (Please note that the use of 10,000 shares in the above examples are simplistic and for illustrative purposes only. The actual number of shares needed to offset the risk is determined by a complex formula that includes the amount that the puts are ITM/OTM, time to expiration, IV, etc.)

 
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