Good morning, oh i don't know what time this is gon na actually come out at, but it's not even morning here it's freaking, 6 47 at night, but nonetheless welcome to part two of the overall market makers options. Sort of by you know tutorial not tutorial, but you know walk through talk through of uh. You know this series, so this is going to be talking about hedging for the upside, welcome back to freaking, trace, tutors and welcome to trey's trades baby. What is up, everybody welcome to tracerates, really freaking talk fast and don't skip class.

I like a bunch by saying that i'm going to finish advising our experts. So let's take a look at the grain of salt, let's get into the video. So what is options hedging? If you haven't seen the first piece of this video talking about how options market makers actually work right, i recommend you watch that first, because this is going to be a series kind of walking through everything that i think is important. But i want to talk about hedging for the upside, which can lead to something called a gamma squeeze right.

Hedging for the upside typically typically creates lots of volatile violent moves up right. It's something that people like to see if you're long on the stock, particularly with amc amc, is exactly why i'm making this video. Hopefully this provides value to somebody down the road you know after this amc soccer is done because it is still equally important right. So what is actual upside hedging? It's essentially managing risk for the upside, so in any sort of options, contract market makers, what they have to do is try to be profitable right.

That's why they're in the business they're, trying to make money and hedging is managing downside risk for the upside right. In this case, what i mean by downside risk for the upside? It means if this goes up too much. They don't hedge before it goes up too much. They can lose money on that overall contract right.

So how do they hedge? How do they manage that risk? They buy stock from the market for calls upside? You know man upside hedging means that there's calls calls that are starting to run in the money and they have to manage that risk for the upside by hedging. For the downside. Essentially, they have to buy stock to support these call options if they decide to get exercise from running out the money to in the money right. When does that happen right? This is very, very simple to think about think about it as trying to come out profitable on any sort of trade.

So, let's just say that, hypothetically speaking, the premium for a 60 call is, i don't know we're just gon na make up a number 100 bucks right, 100 per share, which would come out to. If you, you know 100 a share premium times 100 would come out to 10 grand right, obviously that's very, very inflated. That's not what it would actually be, but just as an example right so when they would decide to hedge for the actual premium is when the market value of 100 shares is coming close to or equal to the premium that they made on that overall contract. So in this instance that would be somewhere in the range of since it's ten thousand dollars premium.

Maybe it's approaching nine point: eight thousand to ten thousand dollars right per 100 shares if you have to buy a hundred shares of amc stock and it cost you nine point, eight thousand dollars at that point. These actual market makers are starting to get nervous. They're thinking to themselves, okay, we're running out of profitability here right, because market makers make money when call options expire worthless. They just keep that premium.

That's theirs, that's how they make their cash right, but in this instance, if it starts to run in the money they have to manage the risk, they don't want to come out negative on a trade, so they start to hedge. So it's super easy to think about. Once the 100 share market value is equal to or approaching to right that premium that they're making they start to hedge for their position. So here's an example right check this out.

I've got a hedge zone because people will pay different premiums for different strike prices. Sometimes the same strike price. Here's an example right, so the 60 strike price. For this you know: six dollar strike price premium is 80 cents a share, which means it's 80 bucks total.

Now, if you were to look at a different expiration right, 18 junior fighting theta a little bit, which is time decay right, if you look at the 9 of july, 60 strikes they're much more expensive. So, let's just look at the 9 july 60 strikes. These are and 80 cents, meaning it's 1580 bucks, so for them to essentially hedge that position. It's gon na look a lot different than if they're hedging an 80 cent position right.

It's a much different zone. They have to watch much more closely because they're not making a lot of money on those premiums they're really not so it's actually a zone in which hedging will take place because it's entirely dependent on what people paid for those 60 contracts at the point in which They would come out negative on those overall contracts right, so here's a zone - here's an example, 60 call. Let's say that this is the bottom line. I just made an estimate right.

I can't tell you an exact figure off the top of my head, but here's an estimate. You've got a low ball zone right here. You've got a high ball zone depending on the premium that people are paying for a 60 strike in which they're gon na have to start hedging for that trade right for the upside they buy from the stock market. This is it's at 57 bucks and it starts to run up right boom at 58.

59.60 hits that bottom of the hedge zone. At this point, market makers will start hedging for the cheapest overall premium contracts to manage their risk. They buy stock from the actual stock market. Now, what happens think about this very simply put it drives price up because they have to buy stock from the stock market.

That's hedging that drives price up. It can actually create a gamma squeeze, which is essentially just these market makers managing their delta risk, their delta exposure, which is whether or not they come out profitable on all these sort of transactions right now, when it pours to the top of the zone. Eventually, you meet essentially this pivotal divergence where there's no longer any hedging taking place by 60 call because it's met the the top peak of whatever people are paying for premium. For that 60 call.

So the hedging you know ceases to exist, but at that point right you can see a major move for the upside, and maybe a better way to draw this out would be to show you it this way right where the major gamma squeezing actually takes place with This 60 strike in particular up to the lack of hedging. At that point, you maybe see a little bit of a flat line right until it starts running into more call options that are out the money that starts to run in the money. The hedging can continue. It can create an endless feedback loop right.

That's how gamma squeezes work. Call options run out the money to in the money which causes hedging for the upside right, starting in those hedge zones, which can lead to 61 strikes running the money. 62. 63.

64. 65. They can continue for as long as essentially two things happen right, there's underlying stock buying pressure to support the overall gamma squeeze and two the people who actually buy these call contracts decide to hold them. Now i'm going to talk about this in my next upcoming video, but by selling call options you actually create selling pressure, and i know that sounds kind of goofy.

It's not advertently in any sort of way, but it happens through a process called unhedging which is essentially okay. Let's just imagine all of a sudden. You've got 10 000, not not dollars. 10 000 total call options that a 60 strike right and these market makers decide to head for these 10.

000. 60 strikes it's trading at 62 bucks. Well, all of a sudden, let's just hypothetically hypothetically, say 6 000 of these guys say you know what i made. Some really good cash, i'm going to cash this out and all of a sudden you've got 4 000 total call options at that 60 strike.

Well, what happens now? Is they hedge for ten thousand call options ten thousand times a hundred is a lot of shares right. Ten thousand times a hundred be uh a hundred thousand one million shares right. So that's a million shares they hedge for well. All of a sudden.

You took six hundred thousand shares off the table. They actually need, since those are gone, and that can actually give them a little bit of alleviation. They only actually need 400 000 total shares, so this can actually create unhedging selling pressure now buying call options and buying puts in and of themselves the minute you buy them does nothing to contribute to price action. That's an important piece to say: the buying pressure from call options happens when you buy them out the money and they start to run in the money right.

That's essentially where this really takes place, but you can't create selling pressure by selling call options if you're only rolling those profits into more options instead of also buying under live stock. To basically, you know offset some of the unhedging that can take place so we're going to get it on hedging in the next overall video in the series. If you want to check that out, i think it's actually, you know a good one and it's gon na walk you through what actually, i think took place today here in amc stock. I've got a great example for you, but to close this up, here's an example of a gamma squeeze or hedging right now, this day right here, you had a lot of call options that ended up running in the money.

You were trading at 43 bucks and you had a combination of a short squeeze and a gamma squeeze gamma, squeezing takes place from hedging for market makers for the options market right. So what happened is you've got call options that start running in the money and people held them. They didn't sell them right. They continue to hold them or exercise whatever they might be right and it created this endless feedback loop of gamma, squeezing and short, squeezing more call options that are out.

The money starts to run in the money out the money, meaning that they're above current market value. In the money, meaning they're under current market value right and as that takes place, hedging continues and continues and continues. It continues until people decide that i'm i'm done, i'm good, i'm gon na take my profits or maybe some shorts decide to. You know establish positions, or maybe people take profits, it can create an endless feedback loop and the price.

Can you know infinitely go as high as you want it to go? So that's essentially the process of hedging. I'm gon na make this next video here talking about unhedging, so you can kind of digest that overall process in you know a singular video, so blah blah blah. I know those people drop. It like i said, subscribe.

Everyone to my friends, that's what i freaking got for you guys today, catch y'all, the next one, light taps much love and peace.