26 lines
1.6 KiB
Plaintext
26 lines
1.6 KiB
Plaintext
How Market Makers Manage
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Delta-Neutral Positions
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While market makers are not position traders per se, they are expert
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position managers. For the most part, market makers make their living by
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buying the bid and selling the offer. In general, they don’t act; they react.
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Most of their trades are initiated by taking the other side of what other
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people want to do and then managing the risk of the positions they
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accumulate.
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The business of a market maker is much like that of a casino. A casino
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takes the other side of people’s bets and, in the long run, has a statistical
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(theoretical) edge. For market makers, because theoretical value resides in
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the middle of the bid and the ask, these accommodating trades lead to a
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theoretical profit—that is, the market maker buys below theoretical value
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and sells above. Actual profit—cold, hard cash you can take to the bank—
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is, however, dependent on sound management of the positions that are
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accumulated.
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My career as a market maker was on the floor of the Chicago Board
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Options Exchange (CBOE) from 1998 to 2005. Because, over all, the trades
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I made had a theoretical edge, I hoped to trade as many contracts as
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possible on my markets without getting too long or too short in any option
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series or any of my greeks.
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As a result of reacting to order flow, market makers can accumulate a
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large number of open option series for each class they trade, resulting in a
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single position. For example, Exhibit 16.7 shows a position I had in Ford
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Motor Co. (F) options as a market maker.
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EXHIBIT 16.7 Market-maker position in Ford Motor Co. options. |