Help a noob - Assume you just won $1M and want to start market making...

Discussion in 'Options' started by 76132, Jun 17, 2011.

  1. 76132

    76132

    So assume you found $1M and want to start making markets for one particular stock's option chain.

    How do you start?

    For example. I think a particular stock will go down in price. So what should I do?

    Start buying all the Puts I can? But then I would be speculating and not market making.

    So what do I do instead? Offer a two-sided market for Put Options and wait til people start hitting your bid/asks?

    Basically how do you start? What's the first thing you would do? Buy/short the underlying asset??

    I'm having a hard time stopping myself from just speculating.
     
  2. rmorse

    rmorse ET Sponsor

    What your talking about is NOT market making. Market making is about finding a price range your willing to both buy and sell vol. in an option. Then find the most profitable hedge and manage your risk. The pricing you come up with does not have to fit the market, but if you don't ever put yourself on at least one side of the current market, you'll never trade.

    If your just going to put on some positions or not add depth and liquidity, there is no reason to become a market maker with the regulatory requirements and the costs of being a broker dealer. You would be better off as customer with the right platform.
     
  3. tomk96

    tomk96

    step 1, you'd need to learn how to trade volatility.
     
  4. 76132

    76132

    Thanks. This response has probably helped me understand market making more than all the stuff I've read in the past, haha.

    Ok, so let's say you offer a bid/ask on a call option and someone accepts your ask price and buys a bunch of options from you. Now that you sold a bunch of call options, there is the possibility that he may exercise the call and thus you have to sell a bunch of stock to him.

    Now since that's the case, do you have to go and buy a bunch of the underlying stock?

    Then based on this position, i.e. you sold a bunch of calls and are long a bunch of stock, you adjust your bid/ask so that you can manage your risk?
     
  5. Take 950k and stick it into bond funds.

    "Play" with the rest.

    When you lose the 50k you can send me a check thanking me for giving you advice that saved you from losing lots more.

    (It's obvious from the question that you shouldn't have 1m in account you're going to try the option market.)

    ps the only way you can lose it faster is the futures market.
     
  6. 76132

    76132

    I don't actually have 1M now, and if I did, I would do what you said and just collect coupons for the rest of my life and retire. But if I had 2M, then I'd use the other 1M to do something I really want to do.
     
  7. ++1
     
  8. what's with these stupid threads. if i had a brain i would ask a normal question . what a joke.
     
  9. Buy $1MM in uncut coke from a Mexi cartel. Transport via seaworthy vessel to NC coast (best POE). Drive by minivan (lots of Disney bumper stickers) to NYC and cut 1:1. 7X ROC at street prices.
     
  10. rew

    rew

    Well, at least that's more promising than starting an option MM operation with $1 million.
     
    #10     Jun 27, 2011