Two Cops and a Bunch of Stinking Market Makers

Published September 29, 2017 - 7:30 AM

Happy Friday. Let’s get right to the Mailbag…

Those stinking market makers, I tell ya! I can't count how many times I have attempted to make a trade immediately following one of your recommendations to find that either the stock price and/or option price immediately moves out of buy range.

Could you take a minute one of these days to explain how these market makers operate? I would love to hear your thoughts on this.

 Ryan

That’s a terrific question, Ryan.

While option market makers do have some modest influence on stock and option activity in the very short term, they’re neither as powerful nor as evil as you might think.

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Most option market makers tend to trade “delta neutral.” That means they’re not looking to profit on a stock’s direction. They look to profit on the time decay of the options. So, most of the time, the market makers have no interest in moving prices one direction or another.

It might help to understand what happens when a rush of option orders hits the market…

The market makers have to take the other side of your trade. So, if you’re trying to buy call options, then the market makers are selling them to you. If that was all there was to it, then you’d make money as the stock goes up. And the market maker would lose money.

Remember, though, market makers don’t trade for direction. They don’t want the exposure to losses if the stock goes up. So, they’ll take another trade in order to neutralize their short call position. Most of the time, that means they’ll buy the underlying stock.

Now, imagine what happens when buy orders for thousands of call options hit the market all at once. Market makers have to meet the demand for those orders. Then they have to immediately turn around and buy the stock.

The option price moves up simply as a function of supply and demand (everybody rushing in to buy all at once). And the stock moves up because the market makers are rushing to buy in order to neutralize their positions.

If this occurs solely as a result of a newsletter recommendation, then the action is temporary. Option and stock prices will almost always come back to pre-recommendation levels within a few hours. That’s why I always tell folks not to chase option prices. You’ll almost always get a chance to get into a recommended trade once the initial rush to buy fades away.

You’ve written this a number of times… What do you mean by "The market still hasn't done anything wrong”?

 David

Hi David, thanks for your question.

Have you ever seen one of those cop shows where two officers are on a stakeout? They’ve spent hours sitting in an unmarked car, down the street from a suspect’s apartment. Finally, one cop grows tired of the whole ordeal and says to the other officer, “Look… we know this guy is up to no good. Why don’t we just bust in there and arrest him?”

“We can’t do that,” the other cop responds, “he still hasn’t done anything wrong.”

That’s my current view of the stock market.

We suspect the market is up to no good. Volatility is too low. Bullish sentiment is too high. Central banks are too involved. And too many technical indicators are diverging from the bullish trend.

Yet, the price momentum remains bullish. We haven’t seen any of the sort of weakness that typically occurs right before a correction or a major decline. The trend is higher.

So, when subscribers ask me, “Look… we know the market is going to collapse at some point. Why don’t we just bust in there and short the heck out of stocks?” my only response is, “We can’t. It still hasn’t done anything wrong.”

Best regards and good trading,

Jeff Clark

P.S. Besides the profits they lock in from my trade recommendations, one of the most common things we hear about from readers is that the education and guidance that the Delta Report provides is second to none.

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Reader Mailbag

If you have a question, suggestion, or piece of insight you’d like featured in our Reader Mailbag, send it right here.

Today, we hear from several new Delta Report subscribers…

I will be 56 in November, so I think I am a few years older than you. But I feel it is respectful to address you as Mr. Clark.

I just read your answer to my MACD question in the Reader Mailbag. Thanks for the confirmation!

 Douglas

I have not started trading yet; must tell you… been following you at Stansberry for couple of years. What I like, after three days, is all of your information on the market. I don’t feel I’m alone in this process.

Looking forward to using your years of experience.

 Jeffrey

I am a new lifetime member who, as a Stansberry Alliance member, followed you back when you were with them. I recently joined your service, have watched the videos, and have been excited to make my first option trade. I use Fidelity and already had approval for option trading, but when I went in today to sell the put you recommended, I found that I needed an additional level of approval from Fidelity to do this and it would take a day or so to do.

I'm disappointed to not be able to jump in on what appears to be a great trade and wish I would have known prior about the issues I ran into today so I could have taken care of this prior to a trade idea being posted.

Nonetheless, I have always enjoyed your commentary and am looking forward to putting my learnings into action. Hopefully you will have another options play coming out shortly while I try and wind my way through the Fidelity maze!

 Drew

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