They aren’t necessarily hedged at all possible prices, just the current ones. So, for example, if you (as the counter party) are short the underlying to hedge your long call option, you need to hold delta units of the underlying for each unit subject to the option, where delta is the change in value of the option per $ of change in the value of the underlying. But delta goes up as the price of the underlying increases. So as price goes up, you need to short more and more shares to stay hedged. And vice versa as the price goes down on the put side.
And the overall dynamic shouldn’t be that surprising. When you buy a bunch of shares of something, the price goes up, at least temporarily. When you express a more complicated view, that view also gets reflected in market prices, at least temporarily. The problem is that when you want to unwind the position, that dynamic works against you. As the remaining life of the call gets lower, so does delta. That means part of the hedging short position gets unwound, which pushes the price of the underlying up.
It’s not really a “nobody is hiring” recession but more of a “I yurn for the days when I was able to buy a bunch of shit that I prolly really shouldn’t have” recession.
I’ll drop this, I guess. But this description just seems like the classic Reddit gamma squeeze strategy? So, for an exogenous increase in stock price, the option position and hedging activity adds a little gasoline. But the same is true on the downside (as you note), so it isn’t clear to me how this is, in total, a beneficial thing for the Pimco side.
In any event, I don’t think the book described this well at all, and I’m not convinced that the author actually understood what she was attempting to describe.
Can’t wait to see what raises are going to look like this year. I think they’ve averaged something like 1-2.5% per year college wide for the last 10 years. I can’t imagine people being satisfied with that this year.
