How Large Option Positions May Create Price-Resisting Walls
Summary
This discussion considers the idea that large short positions in out-of-the-money calls and puts could act as resistance and support near their strikes. In the answer's proposed mechanism, dealers holding the other side of those options hedge with the underlying: as the stock rises, dealer selling may dampen the move, while as it falls, dealer buying may cushion the decline. The strikes can therefore be described as levels the market must move through, though this framing is informal.
The explanation is conditional on dealers' positions and hedging behavior, and on the options being large enough to matter. It gives no data showing that such effects occur reliably, and it does not establish claims about a named investor. A second response explicitly frames broader claims about controlling volatility through options supply as speculation. The document does not provide a tested strategy, risk analysis, or evidence that the effect is repeatable, so the proposed mechanism should be treated as a hypothesis rather than a dependable trading rule.
Key ideas
- Large short positions in out-of-the-money calls and puts are proposed as potential resistance and support near their strikes.
- Dealer delta hedging could dampen price moves if dealers hold the opposite side of those options.
- The proposed effect depends on position size and dealer exposure.
- The discussion provides no empirical evidence that option walls reliably control volatility.
- Claims about a specific investor's use of the strategy remain unverified in the document.
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Full text
# What are "call and put walls" around a strike price, to kill off vega and prevent gamma? # What are "call and put walls" around a strike price, to kill off vega and prevent gamma? Is there another name for this strategy? A colleague told me that hedge fund manager Steven A. Cohen likes to squash volatility with this strategy. > Cohen would create massive blocks of expensive puts and calls around a strike price, to eliminate vega and prevent gamma. Cohen would collect the premiums, while long investors would have to churn through his walls before gamma could be ramped. By the time you got gamma squeezed, theta decay will have eroded any profit from your options holdings. Can anyone elaborate please? Cohen's selling to open here right? But how does Cohen turn his short puts and calls into walls? Why would theta wear away your profits...what if you bought a LEAP call? ## Answer by dm63 (score 2) https://quant.stackexchange.com/a/70590 Along the lines of @nbbo2 thinking, if a participant sold large amounts of +10% otm calls and -10% puts, it can be a self fulfilling profitable strategy as follows: market makers are long these options, so if the stock appreciates, they have to sell to delta hedge, limiting the upward price movement. Likewise, if the stock falls, they have to buy to delta hedge, limiting the downward price movement. Thus, the delta hedging by dealers tends to limit price movement in either direction. One could interpret the option strikes as ‘walls’ that the market needs to fight through if the options are to be exercised. This strategy could only be employed by deep pocketed investors, as it must be done in large size to be effective. ## Answer by UnfortunateSum (score 0) https://quant.stackexchange.com/a/66163 Volatility = Vega = Supply/Demand (Marginal Cost of FOMO) Just hypothetical stuff here. Control the price through controlling the volume in the most important near-mark strikes. You set the price to what you want, which pushes out or pulls in the price of the strikes that are further out. You just control the volatility by changing what you're willing to buy and sell for, but because it's such a large portion of the most influential strikes, you can change the skew, the strength or lack thereof; the vega. It's pure speculation though. Nobody does this 24/7 thinking it's repeatable at will. I have no idea if Cohen did anything like this, nor do I have any personal interest in the matter. Just want to make that clear. Maybe the put walls will be played by someone famous in a movie :)
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