Market in the toilet who’s buying?

djbradles

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can anyone translate this?

Great read. This is none other than another 2008 mortgage backed security crisis. The only other elephant in the room is that it’s so big that the fiat system of currency is facing an unprecedented crash. Semantics and terminology aside of course since I’m not a market scholar.

Softbank is just riding the momentum trade wave, actually it’s exacerbating it. It’s inflating a bubble bigger and like musical chairs someone will be left without a chair, namely, the taxpayers.

I liked this quote:
“... or that dealers have not yet figured out a proper strategy to hammer implied vol. One thing that is certain is that it is only a matter of time before dealers, who were counterparties to the SoftBank trade and are likely nursing billions in losses (assuming they didn't delta-hedge all of their exposure) will do everything in their power to punish the Japanese conglomerate. And even if they did fully delta-hedge their outlier gamma exposure, now that the FAAMG rally has broken, the precipitous ramp observed on the way up is about to reverse as dealers start dumping the stocks they had to buy as gamma spiked, leading to a mirror image of the melt up trade. In short, while SoftBank may have made a 100% profit, unless it somehow unwinds this trade asap, it risks losing not only all of its gains but also suffer material losses that would eat into the option premium and would then also hammer the value of its underlying stock investments.

The bottom line is that as one unnamed trader quoted by the FT said, "it’s just a levered punt on the market. The whole strategy is just momentum buying."
 

Varmint

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It's now Sept and still no stimulus from Congress. Clearly the Dems aren't going to give Trump any stimulus unless the Republicans agree to a massive leftist handout (state bailout etc).

So what are we going to get? Maybe nothing - neither side can dare give the other side anything before the election.

With no multi-trillion stimulus coming the stock market is going to crash hard. Clock is ticking.
 

pewpewpew

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can anyone translate this?

I feel like I can never make it through ZH articles... they always seem to be like 2-3x longer than necessary and sort of veer into rant territory.

Anyways, it was inevitable that someone would give this a shot, and it just happened to be that SoftBank had the balls (or the desperation) and funds to do it. I have thought about this same thing on illiquid names.

All options have key characteristics called "greeks", one of which is delta which basically says that at the current price level, the price of the option will theoretically move as though you were holding <delta> number of shares of the underlying asset. Another is gamma, which says that as the price goes up or down 1 point, delta will move by <gamma> amount.

A long call is long gamma -- as the price of the underlying goes up, your p/l increases non-linearly because at each higher price, your call has a greater delta, thus equivalent to more shares.

When you buy a call, someone sells it to you, the intermediary, the market maker, is the one to do so. If you are long a call (and gamma), the market maker is on the other side, short delta (and gamma). Holding this risk outright on their book is a massive liability so it is hedged with shares of the underlying asset to offset the short delta position.

Now here is the crux of the issue -- the underlying asset has a delta of 1 and a gamma of zero: One share is equivalent to one share, and that will not change regardless of how the price moves up or down. So, market makers are using an asset with a gamma of zero (linear P/L) to hedge a non-linear liability (non-zero gamma). Since the market makers are short delta and gamma, as the price of the underlying asset climbs, their losses outstrip their hedge, as the liability "curves away" from the hedge due to the non-zero gamma. How do they remedy this? By buying more underlying to even out the delta discrepancy. You can think of this as matching the hedge line P/L to the tangent line of the short option P/L curve.

They know that this is a positive feedback loop with momentum-traders coming in to buy even more calls, forcing MMs to buy even more shares, on and on. So, the MMs try to dissuade the call-buying by raising the price (higher implied volatility) to entice people to sell (which would allow them to unload some of the hedge).

What is most interesting to me is this: This should *I think* all come out as a wash in the end, or even profit to MMs, if they have the margin and liquidity to get through it. In the end of the day, MMs have zero or near-zero transaction costs, and so can hedge quite effectively, options expire and MMs unwind the hedge, or they are exercised, delivered at the strike price (which is almost guaranteed to be higher than the price of the hedge) and then likely sold, or they are rolled out, which would also have a lower delta and unwind the hedge somewhat. I guess some portion of people will exercise and hold the assigned shares, since they show a profit, and were acquired at 'discount' prices, but how many?
 

Broccoli Iglesias

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It's now Sept and still no stimulus from Congress. Clearly the Dems aren't going to give Trump any stimulus unless the Republicans agree to a massive leftist handout (state bailout etc).

So what are we going to get? Maybe nothing - neither side can dare give the other side anything before the election.

With no multi-trillion stimulus coming the stock market is going to crash hard. Clock is ticking.
Let it crash. We dont need more stimulus. Even if we get a stimulus plan passed, you are just pushing the crash a little further down the road.
 

Varmint

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Let it crash. We dont need more stimulus. Even if we get a stimulus plan passed, you are just pushing the crash a little further down the road.
You mean let the stock market bubbles follow their natural course and crash so we can get back to a healthy market condition? Yeah, no, they'll never let that happen. If Congress doesn't pass trillions in stimulus, the Fed will just print it.
 

Varmint

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Apple is down $100 billion in premarket trading.

That's larger than GLD, SLV, GDX and GDXJ combined.

If that money went into gold and miners they'd double in the premarket. That day is coming peeps.
 
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Any thoughts on F getting a bump due to burned up cruisers needing to be replaced and/or new Bronco taking off potentially?
Not that this means a whole lot, but one firm upgraded F today. I guess that means F will double by this weekend, huh?
Actually, F is one of the few stocks on my screen that are in the green today (so far). Yippee!
Evercore ISI Group Upgrades Ford Motor to In-Line, Announces $8 Price Target
 

djbradles

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I’m so tempted to buy OXY right now. I mean it hasn’t been this low since 2001. Any kinda crisis in the Suez or even a hard winter here has got to have that stock poppin higher, right?
 

Varmint

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I’m so tempted to buy OXY right now. I mean it hasn’t been this low since 2001. Any kinda crisis in the Suez or even a hard winter here has got to have that stock poppin higher, right?
I don't know much about OXY specifically, but oil companies definitely fall into the "buy when there's blood in the streets" category. They're priced as if we'll all be driving fusion-powered cars in 3 years.
 

djbradles

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I don't know much about OXY specifically, but oil companies definitely fall into the "buy when there's blood in the streets" category. They're priced as if we'll all be driving fusion-powered cars in 3 years.
Well the Saudi’s just put a nail in the proverbial coffin of the US oil industry today. There is no cheaper oil than Saudi oil. There will be more bankruptcies in US oil and gas companies coming. We’ll see how it pans out through winter.
 
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Okay, so what happens next?
If we only knew (with certainty)!
FWIW, $9 low was on 18 Mar 2020
If you expect OXY to be higher in the next sixty days or so, you could (A) go long the stock, buy 1000 shares at $10.19 or $10190.00
or (B) you could also have the right to buy those 1000 shares at $9000 by purchasing 10 Jan 15, 2021 $9 calls for $2.40 or $2400.00
With (A) you are a share holder and will receive any dividends paid (marginal dividend yield). You can lose all of your money if OXY goes to Zero.
With (B) you do not own the stock and you will lose all of your money, if the option expires worthless.
Let's say we are smart and OXY is at $14 a share before Christmas:
With (A) we see our 1000 shares valued at $14000.00 +37.3%
With (B) we see our 10 calls valued at ~ $6000.00 [$5 intrinsic value (CMV - Strike price) plus about $1 Time value (option's remaining life)], +150%. You can sell (close) your option position and reap the capital gain or exercise it and purchase the 1000 shares of OXY at $9 per share (actual $11.40 including option premium paid).
Options can be traded before expiration, they can also be assigned before expiration, but usually assignment happens at expiration, if in the money.
Have at it...
 
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Another way to play OXY is as follows (this can be done in a cash account; no margin involved).
Let's say you would like to buy OXY, but not today. You don't expect great moves up in the next few months and wouldn't mind buying the stock below current market value. You will be selling "cash-secured" puts.
With $9000 cash in your account, sell 10 October 16, 2020 $9 puts for $390.00 You are now obligated to purchase 1000 shares of OXY at $9 per share, if assigned.
If OXY is at $9 or higher at expiration, you option expires out of the money. You now have your $9000 free for other trades. You made $390 premium. (Wow! Retire already!).
If OXY is at $8.99 or lower at expiration, you will be buying 1000 shares at $9 a share (actually, $8.61 per share adjusted for premium received). If OXY is below$8.61 you have a paper loss. Where would you be if you simply bought OXY back on 10 September for $10.19 a share?


Needless to say, if OXY soars to $40 a share by October 16, 2020, you will be crying, because you don't own the stock. Your option will expire and you'll have to be content with the $390 premium. My stocks always quadruple in a month; yours?

Enjoy!
 
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djbradles

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Another way to play OXY is as follows (this can be done in a cash account; no margin involved).
Let's say you would like to buy OXY, but not today. You don't expect great moves up in the next few months and wouldn't mind buying the stock below current market value. You will be selling "cash-secured" puts.
With $9000 cash in your account, sell 10 October 16, 2020 $9 puts for $390.00 You are now obligated to purchase 1000 shares of OXY at $9 per share, if assigned.
If OXY is at $9 or higher at expiration, you option expires out of the money. You now have your $9000 free for other trades. You made $390 premium. (Wow! Retire already!).
If OXY is at $8.99 or lower at expiration, you will be buying 1000 shares at $9 a share (actually, $8.61 per share adjusted for premium received). If OXY is below$8.61 you have a paper loss. Where would you be if you simply bought OXY back on 10 September for $10.19 a share?
Enjoy!
Thanks for the effort put forth. I’m personally hesitant to do any options trading. Just not knowledgeable enough. I can stick with one sector via day or limit trades I know right know which is miners only. I’m a simple guy.
 
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Well, these strategies are quite simple, once you learn the basics.
Personally, I stay away from margin trading, so I don't deal with all of the other wild strategies. I can lose enough in a cash account; forget leveraging my losses.
You have to stay within your comfort zone.

BTW, I'll summarize post #1217 (OLN) once it expires on 18 September.
 
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Supermoto

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The last time it was that low was winter 2001.

I just don’t believe the price of oil will be this low for much longer. Maybe 1-2 years max.

I bought more Oxy and some Marathon today.
Plus some GE, for a long term bet that it will eventually recover. Or maybe I'll ride it into the ground
 

Varmint

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Stocks still drifting down - there's talk the new stimulus package being negotiated is now only $500 billion and doesn't include any $1200 handout. I think the stock market was pricing in a $1.5 to $2 trillion package, and is selling off cause that's looking increasingly unlikely.

The beast needs more money printing and isn't getting it.
 

djbradles

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Stocks still drifting down - there's talk the new stimulus package being negotiated is now only $500 billion and doesn't include any $1200 handout. I think the stock market was pricing in a $1.5 to $2 trillion package, and is selling off cause that's looking increasingly unlikely.

The beast needs more money printing and isn't getting it.
View: https://media0.giphy.com/media/1eEB6PajXo34ERbE9g/giphy.gif?cid=82a1493b56y338rn3w61yg85rtfp5vnya93zawa1966prqxi&rid=giphy.gif
 

djbradles

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Ok I have a question. Let’s say there another credit cycle crash in the markets in the next few months predicated upon huge debt defaults of homes to student loans.

What would that do to home prices and more specifically land prices in the aftermath?

Rates are already near zero. There are no such things as balloon loans with high variable interest rates lensed with zero money down. I’m curious what you guys think may happen because I am currently looking at land and a new build. One thing I am sure of is that materials may very well cost more and more making a new build unattractive. If we face a deflationary collapse commodities will also crash. If inflations takes off then things could surely increase with a weaker dollar.
 

pewpewpew

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Ok I have a question. Let’s say there another credit cycle crash in the markets in the next few months predicated upon huge debt defaults of homes to student loans.

What would that do to home prices and more specifically land prices in the aftermath?

Rates are already near zero. There are no such things as balloon loans with high variable interest rates lensed with zero money down. I’m curious what you guys think may happen because I am currently looking at land and a new build. One thing I am sure of is that materials may very well cost more and more making a new build unattractive. If we face a deflationary collapse commodities will also crash. If inflations takes off then things could surely increase with a weaker dollar.
Hmm, an interesting question. It's the big concern -- the fact that the fed has essentially been mag dumping with the balance sheet expansion/QE infinity, and if things really go sideways, what is left for them to do? I suppose they could print harder and faster, and this could come in various forms. Maybe they guarantee purchase of all MBSs or just buy the damn things outright after they are originated? I'm not really familiar with how it all works under the hood. Either way, my best guess is that it would be deflationary across the board in real terms, but nominally, perhaps the printing gets us a bump, or even just a hyper-inflation rocket ship type scenario. Without heavy intervention I would think that it would almost certainly be deflationary in a big way. Especially since a mass default on debt obligations would be preceded by... ??? further massive shock to the economy and GDP contraction? Simply money moving around with less speed, i.e., less available to be spent.

edited to add:

Kinda just started rambling, but TL;DR: Probably deflationary imo. Maybe a few distortions here and there, but ultimately deflationary.
 
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