Somebody told me you can’t sell five million shares quietly.
That’s a bunch of nonsense, and I’ll show you exactly why.
Start with what’s on my screen. Seventy thousand contracts in a single strike, eight minutes into the session. More size than the SPDRs do in the same window most days, in one strike, in one name.
You think somebody woke up in love with the company?
Nobody’s buying that stock because it’s a good company. They’re rushing the marketplace and buying calls, and the stock follows along behind them.
The mechanic is simple enough. You buy a call, a market maker sells it to you, and now he’s short upside he doesn’t want, so he goes and buys stock to hedge himself. That buying is what lifts the price.
The hedge is doing it. Not the earnings, not some fund building a position, not a guy in a leather jacket.
Most people get that far, and almost nobody knows what happens next.
How they get out
So now our market maker is sitting on three million shares he never wanted.
He can’t sell three million shares into the open market. That’s a wall of supply and it grinds price against him the whole way down.
So he doesn’t sell them at all.
He lets the calls he sold expire in the money and the stock gets called away.
Walk through what that means. The options expire Friday afternoon, and over the weekend the clearing house matches every exercised call against somebody short one, so Monday morning those shares are gone from his account at the strike price.
He never entered a sell order. There’s no trade for you to point at, no filing, no headline. The guy who bought the call got exactly what he paid for, and three million shares moved without touching the open market.
Now tell me again you’d have noticed.
Some of them use it as an exit
The sharp ones do this on purpose.
They’ll deliberately trade in-the-money options late in the day for the specific purpose of getting stock called away. No print, no impact, and nothing for anybody to write about.
Which means the volume sitting in front of you in the option chain isn’t always somebody making a bet. Sometimes it’s somebody arranging a delivery.
What to do with it
Stop reading open interest.
Open interest gets calculated at the end of the day, so by the time you’re looking at it the information is stale and the move already happened. Volume is live. The OCC publishes both if you want to see the gap for yourself.
Put today’s volume next to the open interest on whatever you’re trading. When one strike dwarfs everything around it, somebody is doing something mechanical, and mechanical flow moves stock whatever the company happens to be worth.
Your edge has nothing to do with whether the company is any good. It’s knowing who’s forced to do what, and when.
I’ve put 97 sessions on exactly this into one bundle and it’s open this weekend.
→ Show me the volatility bundle
To your success,
Don Kaufman
P.S. There’s something in there I’ve never bundled before.
In 10+ years of running TheoTrade I have never once put my Xmas Tree Alerts inside the Volatility Mega-Bundle. Not once. This Labor Day weekend I’m including 90 days of it, and when the weekend’s over it comes back off.
