Norm Wattenberger: Leaches

Norm Wattenberger · 03-03-2003, 11:28 AM

Rep. Jim Leach (R.-Iowa) re-introduced his anti-Internet gambling bill in the House as H.R. 21. Last time he did get the bill passed. But, only seven or eight people actually voted for it. He called for a vote while almost no one was in the chamber and suspended the rules. It never hit the Senate. Interestingly, the bill specifically excludes all derivatives, stocks, options and other SEC controlled instruments. Necessary since they all fit the definition of gambling in the bill. Of course any government run gambling operation is also excluded.

Zele · 03-03-2003, 01:36 PM

LOL. Just underscores that deep double standard in American law. It's impossible to know, but I'd guess that no more than 10% of the equity/equity-index option volume in this country is anything but pure speculation.

Don Schlesinger · 03-03-2003, 01:40 PM

> LOL. Just underscores that deep double
> standard in American law. It's impossible to
> know, but I'd guess that no more than 10% of
> the equity/equity-index option volume in
> this country is anything but pure
> speculation.

You're hopelessly wrong about that!

I'd say that the majority of options traded in the U.S. -- and most especially index puts -- are used for hedging. Ditto for equity calls, which are used in huge quantities for covered writes.

Don

Don Schlesinger · 03-03-2003, 01:42 PM

"Interestingly, the bill specifically excludes all derivatives, stocks, options and other SEC controlled instruments. Necessary since they all fit the definition of gambling in the bill."

Out of curiosity, what was the language that would define using these instruments as "gambling"?

Don

John Auston · 03-03-2003, 01:43 PM

Hopefully, this will never become law.

You'd think there were more important things, these days, for some in Washington to be focusing on.

Zele · 03-03-2003, 03:51 PM

> You're hopelessly wrong about that!

> I'd say that the majority of options traded
> in the U.S. -- and most especially index
> puts -- are used for hedging. Ditto for
> equity calls, which are used in huge
> quantities for covered writes.

> Don

Ok, perhaps 10% was a little extreme. But I disagree that the majority of equity options, in particular equity index options, are used for hedging. I'm sure that a lot of retail orders are the cliched "grandma in Idaho" hedging her position in large caps, and yes, institutions do also hedge equity positions with large options positions, particularly put buys and zero-cost collars. But I think you are underestimating how much volume is initiated by desk traders at big houses, and even by the upstairs partners of large floor market-makers. In particular, look at how many of the large volume trades go up "tied" to underlying or synthetic underlying (I believe they report these as "CMBO" in the indicies. I'm not sure if tied trades are reported separately in single equities.) Most are big bets on volatility skew, time spreads, or a combination of the two. This simply isn't hedging vs. an underlying postion. It's either pure speculation, or a desk trader front-running a customer order he anticipates. The modern equity options markets are as deep and liquid as the are precisely because of the profusion of speculative activity.

Norm Wattenberger · 03-03-2003, 05:14 PM

Oh I am a betting man. Anyhow, I would guess the overall dollar volume of option contracts is for hedging - but perhaps not the overall number of contracts.

Don Schlesinger · 03-03-2003, 05:19 PM

> Oh I am a betting man. Anyhow, I would guess
> the overall dollar volume of option
> contracts is for hedging - but perhaps not
> the overall number of contracts.

What do you mean by dollar volume? The value of the underlying notional amount, or the simple price of the options?

In either event, having been one of the upstairs traders that Zele refers to, at the biggest options house on Wall Street, I'm not going to debate the point here -- on a blackjack page.

Don