This week stock was drifting higher and $14 call sellers are buying more stock while $14 put sellers are ALSO buying August Queen I Am What I Am Your Approval Isn’t Needed shirt. When the stock is at $10 the chance of a $14 call being ITM in a week is… 30% let’s say (much lower for a normal stock but AMC vol is obviously sky high). The chance of an $14 put being ITM is let’s say… 70%. As the stock moves higher both call and put sellers are buying stock. With the stock at $13.50 the call delta goes to 48% and the put delta goes to 52% as an example.
This week a bunch of call option buyers came in bidding up higher strikes. This forced dealers to buy more stock to hedge. This causes the price to rise. Now as the price of the stock rises, so does the delta (the rate of this change is the gamma). So now the dealers have to buy MORE stock. The closer to expiry the more gamma there is in at the money (ATM) options. So dealers are buying more and more stock which is making the price go up (obviously) which means the call delta goes up which makes them buy more stock. At the same time this is happening to the whole options chain. Tada!
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whether remaining open call and put options will be exercised or not (reflected in the delta being right around 50% – it’s a 50/50 August Queen I Am What I Am Your Approval Isn’t Needed shirt). The dealer doesn’t know if it should be 100% hedged or 0% hedged! Probabilistically they should be 50% hedged. But if the stock gaps down at 3:59:58 the call seller is over hedged and if it spikes at 3:59:58 they are under hedged. If the stock closes at $13.95, calls won’t be exercised, they don’t need to have shares. If the stock closes at $14.05 calls will be exercised, they need to have shares. So heading into the close they are selling every time the stock goes below $14 and buying every time it goes above $14. Yes, they are buying high and selling low. They sold options thus are short vol/ short gamma. On the other hand if dealers are LONG calls or puts they are doing the opposite. A dealer long a $14 put wants to be long 100% of their exposure at $13.98 and 0% at $14.02. So they are long vol, and buying low and selling high.