The equity derivatives market was swirling with speculation last week that several sellers of call options had racked up substantial losses after the share price of OSI Pharmaceuticals more than doubled. Market traders say Susquehanna Financial Group is a big player in the options, but it could not be determined by press time whether the firm was caught in the move. Kelli Crudo, spokeswoman, said the firm does not comment on any trades.
Equity market makers that had sold deep out-of-the-money calls on OSI are believed to have taken a hit when the sudden spike in the cash market last Monday pushed these positions deep in the money. When the calls were exercised, sellers of the options would have had to purchase OSI stock at its new lofty valuation and then sell it to the holders of the call options at the below-market strike price. OSIP's stock price soared to USD91.10 Monday, up from USD38.14 the Friday before. The move was sparked by an announcement that one of its drugs can help prolong the life of lung-cancer patients.
Typically deep out-of-the money options are not fully hedged. Rather, market makers usually only hedge the delta of the option. For example, if a dealer is short USD1 million (notional) of deep out-of-the money calls with a delta of 10, it would likely execute a long stock position of around USD100,000.
Susquehanna has been making a big push to become one of the most active market makers over the past year (DW, 2/29 www.derivativesweek.com).
