Exactly, that's the old point. They write puts and calls, which
they dynamically hedge, but the volatility spike substantially
increased the real value of the whole options market. Most of
them are now bankrupt, I'm afraid. And yes, I wish I wasn't
right, and I wish the regulators dealt with regulating OTC
derivatives before they grew this huge, instead of what they
did - backstopping that market with liquidity injections every
expiration (these are the "PPT" rallies), so the Ponzi
scheme reached unimaginable highs. Now we HAVE to deal with it,
and the only way I see is to close the markets and settle all
contracts as of Friday close, although settling them in
a fair way may not be possible (counterparties can't deliver).
The standard trigger of expiration week rally, OOM put options
premium evaporating as time goes by along with the need to hedge,
is very questionable at this point. It might work, who knows,
but the odds favor a continuing crash, I am afraid. Things
are not obvious.
You are right, the obvious thing is to pick up the pieces
after options sellers go bankrupt, since they will tend
to drive things way too low as they go broke, although
it's not entirely obvious when. -g- |
