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This question came from an actual trade occurred in about 2014 when PIMCO sold very large positions in SPX 1840 put/1920 call strangle. It was reported the premium alone was worth \$100 million (they opened another similar but smaller strangle position). According to the book Bond King, everyone was talking about this trade when the trade was still open.

So the question is, when there was such a large short volatility trade, how would traders hedge their long positions againt PIMCO's short strangle? PIMCO had no capital constraint problem even when volatility rose dramatically (let's assume they didn't have such constraint for brevity), but not necessarily to other traders.

Just a side note, the strangle expired worthless in the end so PIMCO made a huge profit in this trade. Maybe luck or maybe no one wanted to challenge the trade.

user70540
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  • a couple of points: normally such a trade would be pimco vs "the market" - so no single counterparty would have the whole opposite position to pimco's short, hence the exposure would already be diversified. secondly, these distributed positions would likely be managed via delta hedging rather than trying to sell the options into an already offered market. when u say "vols rose dramatically", that may not have material impact since this in effect a short fly position. not sure capital constraints wouldn't be an issue even for pimco if flys rose dramatically on a 100mm premium short position. – user35980 Jan 02 '24 at 05:46
  • well, this PIMCO trade is a posterior trade for now. So if I rephrase my question in this way, what would be the considerations: say there are 500,000 SPX new contracts sold today, expiring in a week at Level X. Then it's very likely SPX would be pinned above X, because of potential assignments at X that causes huge capital requirements. Does it sound reasonable? – user70540 Jan 02 '24 at 17:58

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