General Discussion
In reply to the discussion: "The Squeeze of a Lifetime" or The GameStop stock frenzy, explained. Vox [View all]Blue_true
(31,261 posts)Many decades ago, when a person purchased a stock certificate and that was it, that person was investing in the companys growth prospects.
But then derivatives came along. They are basically modeled after commodities contract mechanisms, where middle companies hedge against a negative change in the price or supply of an underlying commodity. At least for commodities, it makes sense, a biscuit making company, for example can manage its costs by buying wheat contracts at a price, allowing it to use that ingredient price for business costs planning purposes.
But for stocks, it is naked gambling. Big financial companies normally sell Call Options or Put Options, they get immediate income from the sale of the options and then hope that the stock price does not change in a way that they have to buy or sell the underlying stock at a lost.
You are right, there is a lot of insider information involved, also manipulation of a stock price by big financial companies, if they have sold a lot of options and the stock price is going against them.
There are two basic types of Options sales, a naked Options sale and a covered Options sale. In the case of a covered sale, the company owns the number of underlying shares that it sells the Options for. In a naked Options sale, the seller doesnt own the stock, but borrow it from owners - for example, if you own 1000 shares of the Acme Toothpaste company, your Broker may sell options against your shares and borrow them from you - technically, you are supposed to be asked if the shares can be borrowed, but that may not happen - you would not be on the hook, the Broker would be if things go against it, BUT, if the Broker gets wiped out, you may have issues getting access to your shares, especially in the case of a bankruptcy by the Broker.