I came across a fintwit post today that showed monthly options are at an ATH average of $580bn a month. The majority of them concentrated in weekly expirations.
It got me thinking about how much money is needed to payout the shorts should there be a week when the market decides to take another 20-30% crash.
Quick maths, with tons of assumptions:
Let’s say there’s $250bn in weekly puts.
Let’s say they’re all bought ATM.
Let’s say the market crashes quickly and results in back to back limit downs so most people aren’t even able to sell and the majority of them are held to pretty decent gains.
If the markets drop 30% from say $360 (QQQ) that’s $252. A weekly ATM put bought on Monday probably costs about $2 ($200). Assuming you held to full drop – that’s 108 intrinsic value and $106 profit. Or $10,600. Or 5,300% gain per contract.
This is just considering ATM puts. There’s a good % that would be a few strokes lower and return something like 10,000-15,000%. In a week.
Now let’s take those returns and apply them to the $250bn in puts floating around each month.
$250bn + 6,000% gain = $15 trillion dollars.
Just in ATM weeklies!
(Yes this is napkin math and wildly speculative and blah blah – I’m illustrating a point).
When you consider all the short positions, long term dates puts etc, the “cost” of a 30% weekly correction is probably in the 100+ TRILLION $ transfer of wealth to investors who are short American markets.
There’s SO much money waiting to be paid out to shorts that I honestly don’t think the governments could possibly allow it because it’s such a large chunk of money that it would completely distort the entire global economy.
The market is never going to go UP 30% in a week. It’s too large and there’s no catalyst for such a thing to ever happen.
So they can “afford” to payout calls overtime as they have slower, but steadier gains.
However, I honestly think the government (namely the Fed) sees how much money is at stake if they allow the market to correct and I don’t think they can foot the bill.
Especially when you consider the lost 30% in market cap – it would be the single greatest wealth transfer in history.
Tl;dr – there so much $ in leveraged short positions that a 20-30% crash in a week would be the largest transfer of wealth in history and possibly cost over $100 trillion in pay outs to bears.