Derivatives Driven Crash...
A Brit by the name Andrew Smithers has been saying for years that a time may come when the major brokerage houses may exacerbate a market crash because of their derivative trading.
The big options sellers are not the small traders, but the big houses. Normally they are able near options expirations time to bring the prices of the tradables to a level where most options would expire worthless, or with the least amount of profit for the purchaser. High call option open interest, therefore, creates a ‘ceiling’ for the price of the underlying, and high put open interest will create a ‘floor’.
The problem develops when they cannot control the price, and find themselves in danger of suffering great losses. Under the circumstances like this week, when price decline was uncontrollable, they may have had no choice but to short the market into the decline, in an attempt to hedge their open sold put positions.
I think that this is what we have witnessed this week. The big sellers of stocks probably were not the traders or the public, but the major brokerages. I don’t know whether there is a way to prove it this way or another, but to me it sounds like a logical possibility and in line with the Smithers’ forecast.
If this indeed is the case, then around the options expiration time, ideally (for them) a severe drop in tha markets with a selling climax would take place, so that they would be able to cover their short positions into the decline, without triggering a squeeze.
That’s probably what is happening.
AK |
