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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?

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    $\begingroup$ Sounds like he is willing to sell large amounts of calls at a strike above the current market and large amounts of puts at a strike below. Also sounds like the kind of strategy that only works if you have infinite wealth (and don't care about CBOE and SEC investigations...). $\endgroup$
    – nbbo2
    Jan 26, 2021 at 14:44

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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.

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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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