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The Implied Order Book...


schmeljones
Posts: 17
Topic starter
(@schmeljones)
Active Member
Joined: 1 year ago

"The Implied Order Book...Or, How I Learned To Start Worrying That Selling Puts Against SPX Increases Systemic Crash Risk"

In my efforts to understand more about who exactly is taking the other side of my sold puts, I stumbled across this "white paper" from this Twitter user that I *think* I understand like 60% of.

It's pretty interesting and essentially makes the argument that the net put/call positions established by investors like us leads to market makers ("option dealers" in the paper) hedging their exposure and having large effects on index liquidity, and thus volatility.

Put option sellers like us are called out (and this is the part I don't really understand) for market makers having to sell the index when IV increases due to vanna exposure which I guess leads to a sort of reverse short squeeze?

Anyways, I thought I would drop this here since think at least a few of you might appreciate it.

3 Replies
NavyPack
Posts: 185
(@navypack)
Estimable Member
Joined: 2 years ago

I'll need to spend some time on that one and makes me want to be better with data and Python.

Is the VEX and GEX predictive, which could help side step the big drop days?

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schmeljones
Posts: 17
Topic starter
(@schmeljones)
Active Member
Joined: 1 year ago

Don't really know about that but the author suggests they are correlative with market vol but not causative. I'm not actual changing anything I do, since whatever info the VEX/GEX provides should be priced into an efficient market. Also the author is trying to sell their own VEX/GEX tracking data subscription...

Re: python - I'm a data scientist/programming working with biological data in my day job, but I've built a few python scripts to update a google spreadsheet with Black-scholes option pricing to track performance, leverage, VIX etc. When I have time, I might put that up on github and do a blog how-to post!

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earlyretirementnow.com
Posts: 297
(@earlyretirementnowcom)
Member
Joined: 6 years ago

Interesting paper. I agree that the option greeks can and will contribute to the sell-off. Something variation of these mechanics certainly happened on Feb 5, 2018.

The paper is certainly a good reason to trade the ultra-short DTE options the way I propose. That's because these unravelings the author describes usually take s a number of days to develop.

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