Look Out Below: Why a Rug-Pull Flash Crash Makes Perfect Sense, by Charles Hugh Smith

You can make a ton of money on stock index and individual stock put options when the markets and sentiment are as they are now and the market crashes. With all the fun and games that go on in financial markets, one or more of the bigger players in the market could probably make it happen . . . after they buy those put options. From Charles Hugh Smith at oftwominds.com:

It makes perfect financial sense to crash the market and no sense to reward the retail options marks by pushing it higher.

An extraordinary opportunity to scoop up mega-millions in profits has arisen, and grabbing all this free money makes perfect financial sense. Now the question is: will those who have the means to grab the dough have the guts to do so?

Here’s the opportunity: retail punters have gone wild for call options, churning $2.6 trillion in mostly short-term calls–bets on gains now, not later. This expansion of retail options exposure is unprecedented not just in its volume but in its concentration in short-term bets (options that expire in a few days) and in mega-cap tech companies that are commanding rich premiums for options.

Goldman Stunned By The Record $2.6 Trillion In Option Notional Traded Last Friday

The options market is like every other market only more so. The price of an option–a bet that a stock, ETF or index will go up or down before the option expires–is sensitive to the volatility of the underlying equity, the demand of other punters for options and the premium being demanded for time: the farther out the expiration date, the higher the cost of the option.

Recall that anyone with 100 shares of the underlying equity can write/originate an option. Each option controls 100 shares, so a call option that is listed at $1 costs the buyer of the call $100.

This is very sweet leverage if the market goes your way. You get all the gains of the 100 shares for a cost considerably less than buying the 100 shares outright. No wonder retail punters are going crazy for this cheap leverage to maximize gains in “can’t lose” trades.

Options have one funny trait: they can expire worthless and the punter loses the entire bet. Each option has an expiration date and a strike price–the price of the underlying equity that’s the pivot point for the bet: calls gain value if the equity’s price moves above the strike price and puts gain value if the equity’s price falls below the strike price.

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