# To hedge, why not simply buy puts that expire on the same date as your calls?

This r/options comment avouches that on Sept 24 2020

Someone bought 40,000 [T]esla puts. The strike price is 40 dollars so the puts will only pay out if Tesla is below \$40. The expiration date is October 2nd so that is the last day they can have that happen. The price they paid was$0.03/contract.

Putting that all together, someone paid \$120k on a bet that Tesla will drop over 90% in the next week. Why would someone do this? It is kind of hard to say as that doesn't seem like the best strike or expirat[i]on date they could have gotten. Odds are though that it is a fund who is actually bullish on [T]esla (think it will go up). They likely bought calls and the team that calculates their risk management said the risk of the stock going to 0 was too great to make the play they wanted to make. So to hedge that risk they purchased these cheap puts (0.03 or$3/contract) to allow them to make the actual upside play they want to make.

I don't know if the put buyer had calls, and the expiry of those calls. But let's purport that the put hold had calls that expired in Sep 2022. Assume that all puts mentioned below can be bought.

Then what are the advantages and disadvantages of buying puts that expire in Sep 2022 vs. repeatedly buying any put that expires before Sep 2022 (e.g. 7DTE weekly, 30DTE monthly, 365DTE yearly)?

• Are you sure it wasn't just one person/algo selling (shorting) 40k puts filling many other algos' bids to collect the premium at expiration? – Lex Sep 29 '20 at 23:13
• There's no real way to answer this. Your proposed hedging strategy doesn't make much more sense, assuming they bought straddles at 40 strike. Honestly, I can imagine it's almost more likely this was simply a fat-finger (eg, long v. short puts or long puts at 40 .v 400 for a stock trading ~420). There are still people that collect premium on far OTM puts as a strategy, as risky as it is – Chris Sep 30 '20 at 0:58
• Many still collect premium on far far OTM options, but still the question arrises: why would anyone bid for 40k puts so far. Most market makers have minimum volume limits, not gross price so 40k is still very high volume. – TomDecimus Sep 30 '20 at 2:13

This is all speculation but let's assume that someone was bullish and did own long dated calls on Tesla. This may be the primary view of the speculator that the stock would go up. The purchase of the deep out of the money shorter dated puts could just be a crash hedge in the event that the stock crashes from it's already elevated levels. Stocks tend to have big swift moves downward and smaller moves upward (although in Tesla's case there are big up "crashes" as well). As such, these cheap puts could afford significant protection in the event that the stock crashes. The position could appreciate from the delta and gamma exposure of long puts. Additionally, in a crash the vega would also most likely be working on the hedge in a big move downward. Don't forget the position could be sold, and not necessarily held to expiration for the speculator to monetize their gains.

Why not match the hedge to the original long date of the calls? The speculator 1) may not have wanted a lot of time decay on his position and intentionally took longer dated calls to express his bullish view, 2) the view might have been an implied vol long vega view rather than a delta gamma view. 3) Longer dated puts with a lot of time value can be expensive.

Why short dated puts against long dated calls? Possible explanations for these instruments being used: 1) This could be a temporary hedge due to the speculator viewing a short term risky period for the stock (perhaps earnings announcement?) 2) Shorter dated options have larger gamma. Although if these are really out of the money the puts, they won't have much gamma but the gamma (and delta) would be growing as the stock crashed. 3) The speculator would not want to commit much capital to the hedge. 4) The speculator only needed protection against large down moves and could weather smaller moves.

The advantages of shorter dated put protection are: 1) cheaper protection 2) protection more in line with their shorter term outlook, 3) more protection for the buck with higher gamma trade.

The disadvantages of using very short dated puts for protection is: 1) the large theta exposure. These short dated put options will experience rapid time decay 2) the speculator would have roll risk if they wanted to extend the protection in that they would have to buy puts at perhaps higher implied vols (of course it could cheapen as well)

With TSLA in the 420's, buying 40,000 $40 strike puts that expire in a few days makes no sense at all as a bet on a drop in price or even an expansion of IV. It's wasted money since they're worthless in a few days. It also makes no sense that this position would hedge a long call position effectively (the opinion in the source link). I'd guess that this might have been a buy to close transaction, booking profits and freeing up margin. Check the open interest on the day(s) of the call purchase to see if it is reflected there. If the open interest increased when this transaction occurred, I'd look to see if there was a similar increase or decrease in another contract, suggesting that this leg was part of a spread and might have been utilized to hedge the risk of a short leg and reduce margin. However, given that the$40 strike is so far OTM and the premiums are negligible, this idea isn't likely.

One last possibility is either a fat finger trade (doubtful) or just bad data which will be corrected shortly.