the secret game-plan of option writers

we all know
the number of option sellers
are much lesser than the number of option buyers
as option selling requires much more premiumthan option buying
besides there being more and unlimited risk in selling options!

are option sellers (or "writers" as they are called) bad on money matters
that they opt for risky and expensive option of writing option?

they are supposed to be smart people
and they are not fools.

so what they do cannot be wrong
atleast not for overwhelming majority of the times!

yesterday, i observed some strange things.

they were always in front of me
but somehow they always skipped my eyes.

i was observing the behaviour of
the quotes for call options of bank nifty
on the trading terminal.

the first obvious observation -
as the underlying rate of the index increased
the asking rate for SELLING the call option
kept on increasing systematically
rather, very systematically.

second observation -
they always smoothly maintained the premium gap
between their asking rate
and asking rate of buyers.

third observation -
the premium kept on increasing
with the rate of increase of the underlying price.

fourth observation -
and this one is quite significant....
THERE WAS NO SHORTAGE OF NUMBER OF LOTS
ON THE SALE!!!

fifth observation -
and this is bombastic!

THE SELLERS WERE READY TO SELL ANY NUMBER OF LOT OF OPTIONS
IRRESPECTIVE OF MARKET CONDITIONS!!!

sixth Observation -
and this mind blowing!!
THE SELLERS WERE PROVED TO BE WRONG IN THEIR POSITIONS.

--

i was shocked !
what are these sellers doing?
they are supposed to be custodians of smart money
and they are losing!!!?

what is their game plan?

all they stand to gain is
the premium amount
and that too
at the expiry!

and that too, if they are right.
and in this case
as i saw
they turned out to be wrong!

being smart money
they couldn't be wrong
even when caught red handed.
there must be something more than that meets our eyes!
so, what is their game plan?
what are they up to?
--

i searched for clues to the answer
but didn't seem to get it.

then,
it struck me
"who is writing the put options?
what is happening at the put writing space?
what's the scenario there?"

i shifted my attention.
i focused on the put writing column for some time
and was shocked with a smile!

it was exactly the mirror image of what was happening
in the call writing column.

* as the underlying rate of the stock fell
the asking rate for SELLING the call option
kept on increasing systematically
rather, very systematically.

the asking rates were changing as if being controlled by a computer.
i am sure it was a computer behind it all!

the change in the asking rates of option buying was more jerky
and intermittent than option writing!

this indicated that humans were buying from computer software!!!

* the put writers always maintained the premium gap
between their asking rate
and asking rate of buyers of put options.

* the premium kept on increasing with the rate of fall of underlying price.

* THERE WAS NO SHORTAGE OF NUMBER OF PUT LOTS ON THE SALE!!!

* THE SELLERS WERE READY TO SELL ANY NUMBER OF LOTs OF PUT OPTIONS TOO
WITHOUT BOTHERING ABOUT WHETHER THE PRICE WILL KEEP FALLING OR NOT!!!

and last but not the least (rather the most crucial)
THE SELLERS WERE PROVED TO BE WRONG IN THEIR POSITIONS again!

--

all pieces of puzzle seemed to fall in place now.

the end of the thread of the game was in my hand.

the tactic of the option writers was simple

= they were selling any number of calls being asked by buyers
but at handsome premium!

and they were selling any number of puts being asked by buyers
but at handsome premium!

the loss in put writing was sure to be offset by the gain in call writing
or vice versa in reverse market movement

they always were assured of premium gain.

so they never bothered about
which way the market was going to go

they will always be assured of going with the trend
courtesy computers in their service.

but there were two more critical requisites for this strategy to succeed

one, they had to have very big bags of money (we all know they have! not just big bags but currency printing machines!!!)

two, they have to be satisfied with just premiums!

the second condition was a bit perplexing!

but when i recalled the annual earning figures of all big operators / FIIs / banks
i realized that they never earned more than 50-200% per annum
big from our standards
but too small with respect of our own stupid expectations.

getting 50% plus per annum was a cake walk if one was assured of the premiums only!
and that was precisely there game!!!

they had money
they were satisfied with premiums only!

even normal percentage return on big big volumes would give them millions (if not billions) of returns in absolute value.

it is a game of principal amount, not percentage.

--

a big cartel or wing of the operators or big pockets
are not interested in the future of the market.
their own future lies
in the present of the market- the premiums of the current and nearby series!
moreover,
they are also not overtly bothered about the market fluctuations.

they have the regulator controls in their hand
- not supporting buying when they want it to slip.
- not supporting selling when they want it to rise.
- supporting buying when they want it to soar
- supporting selling when they want it to collapse.

--

i stood where i was sitting

and saluted the writers

not the story writers
but the fortune writers!!!