36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
22 Part I: Basic Properties of Stock Options
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in a very small percentage of cases, he could be assigned under very illogical cir
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cumstances.
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THE OPTION MARKETS
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The trader of stocks does not have to become very familiar with the details of the way
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the stock market works in order to make money. Stocks don't expire, nor Cal} an
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investor be pulled out of his investment unexpectedly. However, the option trader is
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required to do more homework regarding the operation of the option markets. In
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fact, the option strategist who does not know the details of the working of the option
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markets will likely find that he or she eventually loses some money due to ignorance.
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MARKET-MAKERS
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In at least one respect, stock and listed option markets are similar. Stock markets use
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specialists to do two things: First, they are required to make a market in a stock by
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buying and selling from their own inventory, when public orders to buy or sell the
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stock are absent. Second, they keep the public book of orders, consisting of limit
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orders to buy and sell, as well as stop orders placed by the public. When listed option
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trading began, the Chicago Board Options Exchange (CBOE) introduced a similar
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method of trading, the market-maker and the board broker system. The CBOE
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assigns several market-makers to each optionable stock to provide bids and offers to
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buy and sell options in the absence of public orders. Market-makers cannot handle
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public orders; they buy and sell for their own accounts only. A separate person, the
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board broker, keeps the book of limit orders. The board broker, who cannot do any
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trading, opens the book for traders to see how many orders to buy and sell are placed
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nearest to the current market (consisting of the highest bid and lowest offer). (The
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specialist on the stock exchange keeps a more closed book; he is not required to for
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mally disclose the sizes and prices of the public orders.)
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In theory, the CBOE system is more efficient than the stock exchange system.
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With several market-makers competing to create the market in a particular security,
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the market should be a more efficient one than a single specialist can provide. Also,
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the somewhat open book of public orders should provide a more orderly market. In
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practice, whether the CBOE has a more efficient market is usually a subject for heat
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ed discussion. The strategist need not be concerned with the question.
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The American Stock Exchange uses specialists for its option trading, but it also
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has floor traders who function similarly to market-makers. The regional option
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exchanges use combinations of the two systems; some use market-makers, while oth
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ers use specialists. |