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Typical effort to cause a chain reaction due to the triggering of several stop losses during the thinest hours of trading on May 1st, a sunday:I don't have a bookmark to the forensics of the May situation I read a while back, but there was definitely shenanigans in the after hours trading leading a smash down just before the CME raised margin requirements to the moon. It was a coordinated effort IMO.
Where is a good source of info on the web that shows the number of shorts or longs that are coming due on any given date?
http://www.cftc.gov/oce/web/silver.htmOr...where can a person find data on the number of gold and silver shorts and longs coming due at future dates?
Options expiry is coming up on 12-27: http://www.cmegroup.com/trading/me...rise, to keep the illusion of solvency alive.
http://www.fmxconnect.com/fmxmetals...ion-and-the-May-Silver-2440-Calls-Part-1.aspxOptions Risk, Manipulation, and the May Silver $40 Calls: Part 1
Series Overview
The purpose of this series is to help the reader better understand the risks and pitfalls of trading options and having a position at expiration. We will try to describe exactly what happens at expiration. The concepts here apply to all options markets, but we chose to focus on Silver because an interesting expiration is setting up presently. The upcoming expiry gives us an opportunity to discuss all the pieces of the option puzzle: the Greeks, market manipulation, Pin risk, and other factors.
Lesson #1
In futures markets where major participants are absent, options players dictate market movement for short periods of time. During this time the market may flat line, or it may have large, impulsive moves in either direction. What happens is determined by the strong-handed player, and sometimes his inclination to “game” the market.
The Easter Egg
Observe if you will, the 6 days prior to expiration of Comex May Silver options.
April 21st, Holy Thursday: day before a holiday
April 22nd: Good Friday: CME Closed
April 23rd,Easter Saturday: Markets Closed
April 24th,Easter Sunday: Markets Closed
April 25th, Easter Monday: LME Closed (Largest Physical Bullion Exchange Worldwide)
April 26th, Tuesday: May Options Expiration CME
One may ask, what does the above imply? The above implies that normal liquidity will not be present for the last 5 days before expiration. Sunday Evening US time is usually quite liquid during London hours, but will not be this week. Monday will also be a liquidity ghost town, as LME players will be out. It is doubtful that many US futures liquidity providers will be in the day after Easter either. This is a market ripe for an event.
Throughout this week and next, we will attempt to break down the factors influencing the outcome of this expiration as a proxy for understanding commodity options risk in general. It will include:
· The players and their biases
· Option Greeks demystified
· How to spot when a market is ripe for “management”, like above.
· Regulatory factors enabling this behavior.
http://www.fmxconnect.com/fmxmetals...ion-and-the-May-Silver-2440-Calls-Part-2.aspxPart 2: A Zero-Sum Game
In any single trade, the option buyer and seller are fundamentally at odds. Both types of player (referred to as options long and options short) make their money in opposite ways, and at the expense of the other. The long players expect to make more money scalping Gamma than they lose in Theta over the option’s life. The Short players bet that the Theta they collect will outweigh the market movement and the negative Gamma they incur, most poetically described as “wishing for death”.
To understand how and why markets sometimes get “managed” at expiration it would make sense to first understand the Option Greeks. This combined with who the players actually are, and understanding the regulatory inconsistencies will tell the full tale on why markets are ripe for manipulation near options expiration.
Keeping Score
Managing Options risk is a complex task. We are going to focus here on only three of the “Greeks” used to quantify and manage risk, Delta, Gamma, and Theta. These are the most important ones affecting an option trader’s behavior as expiration approaches and the market is hovering near a strike. We’ll attempt to explain them plainly and simply through examples. For these explanations we must assume that all other Greek parameters: like volatility, rho, etc remain static to better isolate the effects of delta, gamma, and theta on risk.
Delta
In physics Delta means rate of change. In calculus Delta is the tangent of the trajectory. But Delta actually has 3 definitions in the practical trading world. These definitions largely overlap but are not necessarily the same for the whole life of the option.
1. Correlation with the underlying: a Call has a 20 delta. The model generating that delta assumes the Call’s value will change by 20% of what the underlying changes. E.g. Crude Oil goes up by $1.00. The Call will go up by $0.20 assuming other Greeks remain the same.
2. Hedge Ratio: The long 20 delta call would be directionally neutralized if it had a hedge of short 0.20 futures per long options contract. E.g. I am long 100 Crude Oil calls with a 20 delta. I will sell 20 futures to hedge myself directionally. Therefore I will (theoretically) neither make nor lose money in either direction due to underlying movement. I am directionally “flat”
3. Probability of Expiring in-the-money: according to the model, said 20 delta call has a 20% chance of expiring in-the-money. e.g. an option with 30 days to expiry at this volatility has an implied probability of a 20% chance of expiring in-the-money.[1]
Gamma:
Gamma is the second derivative of the option. In physics, it is the rate-of-change of the rate-of-change. In calc it is the tangent of the velocity. For our purposes it is simply how much a delta itself will change (Correlation, Hedge ratio, or Probability), given a change in the underlying price.
Using our Crude Oil 20 delta call option again: Crude rallies from $90.00 to $91.00. In our example, the option has a 20 delta and its correlation/hedge ratio/probability all point to a change in the option’s value of $0.20. But that cannot be entirely correct if one measures the option’s value at the end of the $1.00 move in crude.
Because the market has moved higher, the option has an increased probability of going in the money. Therefore its Correlation, Hedge Ratio and In-The-Money Expiration Probability must increase. In our example, we use our model to re-calculate the delta of the call and find that its delta has gone from 20 to 25. This difference of 5 deltas over a $1.00 move is its Gamma.
Therefore we now have the ability to sell 5 more futures against our 100 calls if we wish to rebalance our directional risk. We get to “Sell High”. And if the market drops back down to $90.00, the option’s delta will once again become 20. We will get to “Buy Low”. Such is the virtue of being long Gamma. The ability to sell when something goes up, and buy it back when it comes down. Provided of course your model is right, and as we’ve said multiple times other Greeks don’t change. Gamma however comes with a cost called Theta.
Theta
The rate at which an out-of-the-money option loses its value over time is Theta. In short, it is the rate at which your long lottery ticket wastes away. As time goes to zero, your out-of-the-money option’s chances of expiring in the money go to zero as well. It is not unlike having tickets to an event that you wish to sell. If interest is tepid in the event (Jethro Tull : Bore ‘em at the Forum) and you can’t get face value for them from someone, you are said to be out-of-the-money. You will lower your price as we get closer to the event itself in the hopes of unloading them. That is an imperfect example of Theta.
Using our 20 delta call again: if it has a Theta of .05. That means it will lose 5 cents of value per day from the march of time, again assuming all those other Greeks we are not talking about remain the same. So as a holder of that Crude Oil call with a 20 delta, you are in a race against time. If you cannot make more than 5 cents per day from delta readjustments (aka Gamma) after the underlying moves, you will be a net loser of money. Put another way, you must “scalp your Gamma” to profit by 5 cents daily just to break even on your option investment. More than 5 cents and you profit, less than that and you lose.
Options Yin and Yang
Gamma and Theta are opposite sides of the same coin. These risks and how they are managed by opposing counterparties, combined with the asymmetric setup in the system are the key to the reasons for why so many option expirations get “pinned” at a strike with large open interest. And also why rarely but more sensationally, markets blow through strikes with big open interest.
It's so aggravating that the regulators simply turn their head each and every expiration date, allowing the fraud to continue. There can be no possible way that JPM has anything close to the quantity of silver they are shorting.
I wish someone like Carlos Slim would place an order for something like two billion in silver, effectively crushing Blythe Masters and the JPM silver desk in one fell swoop.
If you're on the buy side and make unusual trades, the regulators go after you with everything they have immediately, see what happened to the Hunt brothers...
How could they go after you if you simply bought up as much physical bullion as you can afford/find? The Hunt brothers made the mistake of using leverage and having the regulators change the leverage rules on them.
Not necessarily. Opex manipulation is all about getting the price level in place which makes the most options expire worthless, so the bullion bank can cash in the premium on the options. There are probably a lot of july put options below 27.5, so it was rational to push prices up. We'll see whether this was the case on the days after opex when the options trader would have to unwind his position (as i said above). If there's no crash, however, then it was short covering as you said.Hmm.......up 74 cents today. I figured the smash team would try and keep the momentum going and crush silver some more today. I guess they are busy covering some of those shorts.
So far, silver is staying strong just above 31. I really expected to see it brought back to 30.50 at least.
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