DLP Primer Paperclips Notes

Question 1

What is the purpose of the Deep Dive Stocks primer on Dealer Long Puts?

Answer 1

The purpose of the Deep Dive Stocks primer on Dealer Long Puts is to provide educational information and demonstrate the research performed by Deep Dive Stocks on the market.

Question 2

What are Dealer Long Puts (DLPs)?

Answer 2

Dealer Long Puts (DLPs) are puts that the retail investor has sold to the options dealer, typically Out-of-the-Money (OTM) and long-dated, in order to profit from the reduction in volatility.

Question 3

How do DLPs enable a trader to profit from a decline in volatility?

Answer 3

If volatility drops, the value of the DLPs also drops due to vega. The original seller of the puts can then purchase back the puts at a lower price, thereby profiting from the decline in volatility.

Question 4

What is the relationship between delta and vega in DLPs?

Answer 4

The magnitude of vega is almost always greater than the magnitude of delta in DLPs. As the expiry draws near, vega and delta have an equal effect on the option’s value.

Question 5

Why do DLPs become more influenced by volatility and less influenced by price movement as the expiry draws near?

Answer 5

As the expiry draws near, the influence of volatility (via vega) on the option’s value diminishes, while the influence of the movement of the underlying (via delta) becomes more significant.

Question 6

What is the advantage of choosing an option whose curved line is above the bars on the delta and vega graph?

Answer 6

Choosing an option whose curved line is above the bars indicates that it is maximally influenced by volatility (via vega) and minimally influenced by the movement of the underlying (via delta), making it ideal for profiting from declines in volatility.

Question 7

Can a trader also sell calls to capture the same effect as DLPs?

Answer 7

Yes, a trader can sell calls to capture the same effect as DLPs. However, DLPs have gained attention because in most circumstances, selling puts is easier than selling calls due to the raised volatility in depreciatory environments.

Question 8

What do the gold dots represent on the graph?

Answer 8

The gold dots represent the individual data points.

Question 9

What does the squiggly line represent on the graph?

Answer 9

The squiggly line represents the relationship between the DLP data print and the future price change.

Question 10

What does the shaded region on the graph indicate?

Answer 10

The shaded region represents the 68% probability confidence interval.

Question 11

Which timeframes show a strong correlation between DLP accumulation and price change?

Answer 11

The 5-day, 10-day, and 20-day timeframes show a strong correlation.

Question 12

What are the two varieties of DLP graphs on the market scan?

Answer 12

The first variety shows the accumulation of DLPs over three timeframes, and the second variety shows the association of DLP accumulation amount with current values.

Question 13

What do the different colored DLP accumulation amounts represent on the top graph?

Answer 13

The different colored DLP accumulation amounts represent the accumulation over three different timeframes.

Question 14

What does the red-dashed line indicate on the top graph?

Answer 14

The red-dashed line represents the Monday of the most current week.

Question 15

What does the second graph provide in terms of DLP association?

Answer 15

The second graph provides the association of the DLP accumulation amount with current values.

Question 16

What is the relationship between DLPs and options dealers?

Answer 16

DLPs provide short delta to the options dealer, who offloads this long delta into the market by purchasing shares.

Question 17

In which environments are DLPs usually opened?

Answer 17

DLPs are usually opened in high IV (Implied Volatility) environments.

Question 18

What is the role of vanna in options hedging?

Answer 18

Vanna affects how delta changes in options hedging, and can alter delta in non-intuitive but significant ways.

Question 19

How does vanna affect the delta of an option?

Answer 19

Vanna affects how delta changes per change in Implied Volatility (IV).

Question 20

What happens when vanna becomes increasingly potent?

Answer 20

When vanna becomes increasingly potent, gamma starts losing its grip on delta.

Question 21

How can the influence of gamma and vanna on delta be visualized?

Answer 21

By looking at the difference between the magnitudes of gamma and vanna as the price and IV change, a better understanding of their control on delta can be gained.

Question 22

What are the consequences of I.V. rising on DLPs?

Answer 22

Rising I.V. on DLPs increases the magnitude of vanna and the affect per magnitude of vanna.

Question 23

What can happen if vanna takes over deciding how delta will change?

Answer 23

If vanna takes over deciding how delta will change, it can have dynamic and potentially disastrous effects.

Question 24

What is the definition of vanna?

Answer 24

Vanna refers to the sensitivity of the delta to changes in implied volatility.

Question 25

Does the magnitude of vanna need to be greater than the magnitude of gamma for delta to be affected?

Answer 25

No, the magnitude of vanna doesn’t have to be greater than the magnitude of gamma for delta to be affected.

Question 26

When does vanna cause delta to grow in magnitude?

Answer 26

Vanna causes delta to grow in magnitude when vanna is positive.

Question 27

How does vanna affect delta when the options are OTM?

Answer 27

When the options are OTM, vanna causes delta to grow in magnitude, resulting in the purchase of shares.

Question 28

What happens to delta when the ITM DLPs become ITM?

Answer 28

When the ITM DLPs become ITM, delta experiences a gamma squeeze and a worsening gamma, causing shares to be sold.

Question 29

What can be the consequence of a surge of DLPs in the market during times of diminishing liquidity?

Answer 29

A surge of DLPs in the market during times of diminishing liquidity can have a detrimental effect, similar to what happened in February 2020.

Question 30

What methodology was used to analyze the market impact of DLPs?

Answer 30

The market impact of DLPs was analyzed by calculating the average DLP count and their changes over intervals and comparing them against future median price changes of selected ETFs.

Question 31

What were the findings when analyzing the market impact of DLPs?

Answer 31

The findings were remarkable, indicating a significant correlation between the average daily change in DLPs and future price changes of selected ETFs.