29 lines
1.9 KiB
Plaintext
29 lines
1.9 KiB
Plaintext
Trading Flat
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Most market makers like to trade flat—that is, profit from the bid-ask
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spread and strive to lower exposure to direction, time, volatility, and interest
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as much as possible. But market makers are at the mercy of customer
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orders, or paper, as it’s known in the industry. If someone sells, say, the
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March 75 calls to a market maker at the bid, the best-case scenario is that
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moments later someone else buys the same number of the same calls—the
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March 75s, in this case—from that same market maker at the offer. This is
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locking in a profit.
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Unfortunately, this scenario seldom plays out this way. In my seven years
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as a market maker, I can count on one hand the number of times the option
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gods smiled upon me in such a way as to allow me to immediately scalp an
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option. Sometimes, the same option will not trade again for a week or
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longer. Very low-volume options trade “by appointment only.” A market
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maker trading illiquid options may hold the position until it expires, having
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no chance to get out at a reasonable price, often taking a loss on the trade.
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More typically, if a market maker buys an option, he must sell a different
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option to lessen the overall position risk. The skills these traders master are
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to lower bids and offers on options when they are long gamma and/or vega
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and to raise bids and offers on options when they are short gamma and/or
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vega. This raising and lowering of markets is done to manage risk.
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Effectively, this is your standard high school economics supply-and-
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demand curves in living color. When the market demands (buys) all the
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options that are supplied (offered) at a certain price, the price rises. When
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the market supplies (sells) all the options demanded (bid) at a price level,
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the price falls. The catalyst of supply and demand is the market maker and
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his risk tolerance. But instead of the supply and demand for individual
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options, it is supply and demand for gamma, theta, and vega. This is trading
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option greeks. |