Okay so since I've got family members calling me up to ask about YOLOing options let's talk about what's happening.

Maybe you can point your family here too next time they wanna slam GME calls.
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The first thing to know if you're reading this is DO NOT SELL options if you're a person reading an “options basics” thread.

Selling options is not an activity to approach casually.
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Options are basically insurance. And when you sell them, you're underwriting insurance on some possible future scenario.

Let's briefly unpack why LARPing as an underwriter is dangerous.
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Imagine your buddy is like “hey will you insure my house?” and you're like “sure man!” and he's like “okay I'll pay you $2k for the year” and you're like “sweet — free money!”

But then the house burns down.

So you owe him a house.
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Now, if you were a proper underwriter, this wouldn't be an issue because you're insuring a lot of houses and pricing it such that you can afford to buy one every now and then when it burns down.

Not a great gig for soloists though.
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And even professionals get into trouble sometimes, like if you insured a bunch of houses in one neighborhood and then a forest fire takes them all out.

It's how we get the "black swan" stuff - mass, unpriced event contagion.

This GME thing was basically a forest fire.
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So anyhow you don't want to underwrite stuff, being filthy casual that you are, because you'll get steamrolled in ways you can't imagine (and under conditions that are more likely than you might think).

No, my little arsonist, you want to bet on the fire.
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Betting on the fire is is called being “long volatility” and it means you're a buyer of insurance. Buying putscalls is essentially insuring yourself against a scenario.

Cool thing about options markets is that you can ‘insure a house’ without even owning one!
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Some people do insure houses they own - like if you have a long-term SPX holding, you can insure it (with puts) in case something happens to it. Or if you were short SPX you could buy calls as a directional hedge the other way.

But you don’t have to own a thing to insure it.
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You can also just buy insurance on a random house or apartment complex that you don't own.

And it's worth noting here that doing this has the potential to create some strange incentives (you know… to burn the house down…)
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Now - under normal circumstances people don't just go around lighting fires, they're just betting on stuff that they think might happen.

But lately that’s changed - people are mobbing up to buy insurance and then start fires that ensure they get cashed out.
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So groups of people are hunting for houses that have a lot of dry tinder around them.

“Tinder” is basically when the market is overly convinced a specific outcome won’t happen. So the market will sell cheap insurance against it, and also bet against it themselves.
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So like if some hedge fund had bet the farm on a specific block of houses NOT burning down, and then a bunch of underwriters bet on that not happening too that would be a rich pile of tinder.

Especially when there is a ton of layered bets on that same outcome.
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It’s tinder because the market has collectively oversold insurance on this 1 block of houses, and if it burns they will have to buy 1000 blocks of houses.

So when a spark happens, and a small flame starts, people panic.
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Panicked people do all sorts of things.

Sometimes they scramble to buy insurance themselves to hedge, and unfortunately this worsens the problem (it makes the tinder pile bigger, since it adds to the stack of insurance on that block of houses).
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And that's kind of what we're seeing here: a bunch of people got caught out over-selling insurance against GME’s price rising because they thought it was dead.

But then it wasn't, and as they tried to hedge (by buying insurance) that just piled more tinder on.
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So in the GME bonfire, the people who bought insurance are all owed a house, and the people who sold it are getting wiped out.

This also bred an army of arsonists, who discovered that buying insurance against an outcome and then creating that outcome gets you free houses.
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These “populist arsonists” are now hunting for high tinder zones where insurance has been oversold.

And while it's like… “fair” by the strict rules of the game, it's also dangerous to... well, everyone.
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Because people starting fires for profit kind of breaks the whole insurance underwriting game for everyone.

And without insurance, society becomes a bit more brittle and less catastrophe-resilient overall — insurance not existing imperils the solvency of… well, everyone.
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So look: if you want to join the arsonist posse for this phase where it's popular, go for it. I get it: the whole thing is kind of vaguely funny and sticking it to the insurance people (for a change) feels good.

But don't be surprised if you get burned lighting fires.
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And also don't get too greedy because at some point they are gonna fly over with an air tanker and dump a bunch of that orange stuff to put out the blaze.

After all — they always seem to put out fires when they get close to the rich people houses.
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