You then end up with no position at all and have collected the spread in profit – happy days. So how does this work in the world of options where options have so many expirations and strikes? As an options market maker, your ideal scenario is someone buys and sells you the identical option in quick succession, crossing your spread both ways. It’s possible that some market making firms might be willing to accept some degree of risk with a net delta strategy on top of pure risk neutral market making but the more they deviate from risk neutrality the less they would be able to truly classify themselves as a market maker. As a market maker your mandate is to be as risk neutral as possible to protect yourself from the possibility of going broke. The idea that seems to pervade cryptotwitter is that market makers manipulate the price by suppressing the price by going short large amounts of BTC at key price levels to change the market psychology to sell lower and buy it all back and go long again at a lower level – this is patently preposterous because you only have to be wrong about the market direction once and might go broke. The upshot of this is that market makers effectively act to make markets efficient and are compensated for this by capturing these small temporary arbitrages between products.
Gamestop squeeze free#
Of course, this is not free money – if you are unable to buy 35000 on Binance because the BTC price moved up you can lose on this strategy. For example, if you see that BTC trades at 35000 on Binance and you quote 34980/35020 on Bitstamp, someone lifts (buys) your offer at 35020 and you buy it back on Binance at 35000 – you make a profit of $20 (before fees) after you have hedged your portfolio. This is much more easily achieved when you are able to trade a variety of instruments that have very similar risk exposure. A market maker’s job is to make markets (quote bid/ask prices) in securities/derivatives such that they profit from other market participants crossing the bid/ask spread while their own portfolio risk remains flat. There is much misconception in the crypto space about what a market maker’s job is. This article will instead discuss how an options market maker would react in response to a short squeeze scenario such as this and why it doesn’t apply to stock index options or cryptocurrency options on Deribit. This forces the short seller to buy back the shares to deliver, which in turn also pushes the market price higher.īy now there have been many articles online discussing how this phenomenon happened to a company like $GME. There is also the risk of recall – since the stock has skyrocketed, the lender they borrowed from might want to sell their shares at these prices and ask for their shares back. If they run out of margin collateral their position will be liquidated and forcefully bought back on market to close out their position. If the stock goes up after they lose they will have to buy the shares back at a loss, and depending on their margin arrangement with their broker, if they don’t want to buy the shares back they will have to post extra collateral to back the higher dollar value of their shorted shares. The mechanics are simple: a short seller has to borrow shares from someone else for a fee before they sell them on the open market, hoping to profit when they buy the stock back at a lower price. This phenomenon, where a stock rises by so much that people who have short sold a stock end up facing large mark-to-market losses due to a rise in the stock price and are forced to close their position at whatever the available market price, is not new – another relatively recent example was the infamous Volkswagen short squeeze (you can read about this here.
This caused a huge furore in the markets, bringing the term “short squeeze” into the mainstream financial social media. A synopsis of the saga can be found on Wikipedia here. In the week of January 25th, 2021, Gamestop (ticker symbol $GME) rose by several multiples due to a massive short squeeze.
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