Options Degenerate Marketplaces (Part 2)
So, it’s been a while. This month has been quite surreal. It’s a bit difficult to focus on schoolwork and writing itself when stuff like this happens:
So this part, the ending part of Options Degenerate Marketplaces, was a bit delayed. Similarly, I did not expect that in the interim, the concept of options dominance and NOPE itself would blow up so heavily.
In the first part, we discussed simply the concept of options dominance, or a market state — which we find ourselves in — which the weight of the options market (measured of course in the hedge ratio, delta) is a substantial or majority fraction of the underlying’s liquidity. Since liquidity as a word is the analyst or management consultant of the finance world, for this article let’s fix the term to mean market impact, or the change in price of an asset caused by trading it. In a very illiquid market, we expect that buying or selling an asset will change the price of it a whole lot; in a very liquid market, this is the opposite (for a deeper understanding here, check out my post A Story of Volatility, Liquidity, and Returns).
In this part, let’s delve deeper into how options are creating illiquidity, and what this means for the state of the market.