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How The Options Game Broke For Big Institutions

The options game was an easy one for institutions for decades. Sell 95% of the all call and put options to average investors, collect a premium, then easily push the stock to a level where most of the puts/calls expire worthless. The institutions collected 100% of the premium as pure profit. However, in the last 6 months, the options game broke for the big institutions. How did it break? The markets went parabolic, ignoring any sort of fundamental reality. This started with Tesla back in the late summer, 2020. Average investors would buy 1 or 2 call options on Tesla, way out of the money. The problem? Within days of these calls being bought, Tesla was above the strike and in the money. The institutions were hemorrhaging money. This is when the game changed. Institutional players had to start buying the underlying stock to protect themselves, even if the strike seemed insane in terms of being 100’s of percent away. For example, if a small investor purchased 2 call contracts on GME at a $400 strike…when GME was trading at $100, the institution had to buy 200 shares of GME stock to protect themselves. This never happened prior because the small investors were not a big enough entity in the stock market to disrupt the institutional power of pushing stocks around. However, a decade of Federal Reserve stimulus, now government stimulus checks and low margin rates, it is a reality.

Once institutions because covering their call selling, it created even wilder moves in stocks. This buying added to the retail buying frenzy and is one of the main reasons why we see stocks going up 500-1000% in just a few weeks. Again, in a normal market, no institution would ever buy a stock that is $50 after selling 2 calls to an average investor, especially when that stock is at $50 and the investor bought the $200 strike calls expiring in a week. But things have changed. Will things return to normal? Yes, but only once the bubble bursts and a large chunk of the retail investors exit the market or become much more timid.

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