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Strategies & Market Trends : Tech Stock Options
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To: AlienTech who wrote (58256)12/9/1998 2:08:00 AM
From: Herschel Rubin  Read Replies (1) of 58727
 
Peter, Thanks for your response. That sounded reasonable, then AlienTech added fuel to the discussion.

AlienTech: I used to get a kick out of reading your posts when I was in MCAF long ago (summer 1997) before the merger. Then I was not a member of SI, so you never heard from me. At any rate, nice to run into you and thanks for the response.

You raise a key point that a specialist could get obliterated by a downdraft if the they hedge a large buy order for calls with an equivalent amount of stock. That could be disastrous.

So what do they do? To fill the large call option order unhedged, they ALSO take the risk that the stock may run away to the upside and have to buy back the calls at 5X or 10X their initial value?? That's not a solution for them either. They must do some kind of hybrid hedge where they buy SOME stock and then buy some out-of-the-money puts for insurance (but then those puts have to be available for buying, otherwise they must create the puts, and so on..).

Or they don't buy the underlying, but buy out-of-the-money calls.

Any comments?
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