DarienHacker Wrote: ------------------------------------------------------- > mihau10 Wrote: > -------------------------------------------------- > ----- > > It’s not clear to me either. Do cash-settled > > options have to be backed somehow by real > shares? > > the option writer needs to hedge Thanks, I just didn’t realise that the option writer would not sit and wait for losses. Practically the answer was already in my question :).
Bleeck Wrote: ------------------------------------------------------- > My parents held some 10,000 in Volkswagen stock > for years. I talked to them on Friday and they > were pretty pissed off about the losses they’ve > had to deal with this year. > > They were thinking of selling their portfolio. > > On Monday I told them that I couldn’t care less > about their portfolio but they HAD to sell > Volkswagen. > > They got 960 for it and almost made up for all of > their losses thus far this year. > > Amazing stuff. We held a beta mandate and sold off Volkswagen on Monday to cash in. We felt that the stock price at that level was simply not sustainable. Big outperformance in that portfolio 
mihau10 Wrote: ------------------------------------------------------- > DarienHacker Wrote: > -------------------------------------------------- > ----- > > mihau10 Wrote: > > > -------------------------------------------------- > > > ----- > > > It’s not clear to me either. Do cash-settled > > > options have to be backed somehow by real > > shares? > > > > the option writer needs to hedge > > > Thanks, I just didn’t realise that the option > writer would not sit and wait for losses. > Practically the answer was already in my question > :). What are we saying here: the option writer hedged his short position with stock AFTER the calls went away from him? If he was a market maker he probably would’ve had the long stock position on at the time he wrote the calls. I guess he could have been delta hedged with a small stock position against OTM options. And then continuously hedged his short call position as they got more and more in the money, with each successive stock purchase at a higher price? I guess I can see that, but I don’t see how that would lead to a squeeze, it seems that stock buying (for the hedge) would be in response to increase in share price, not a driver.
Anyway the stock price of VW shares has been soaring for almost two months what means that the delta could easily have been approximating one. Though there is not enough information about the strikes and the date the trades were initiated. I personally think that also the panic factor played a substantial role in this case.
I got this from an anonymous post on a website called www.marginalrevolution.com, I think it clears up the cash-settled thing nicely. To flesh out the cash settled options thing a bit: 1. Porsche buys (OTC) cash settled call options from Banks 2. Banks hedge their exposure by buying physical call options from MarketMakers 3. MarketMakers hedge their exposure by buying underlying shares of VOW on the Exchange then: 4. MarketMakers lend the underlying to the HedgeHunds for a bit of profit 5. HedgeFunds sell the underlying back into the Exchange, buying Porsche