====================== In addition to the above post; selling calls on the offer,[closing long position on offer] dont know much about that, perhaps i dont give enough time like limit order buys. As far as buying on bid on high liquid options, better chance of that occasionaly; and different & even more so if underlying ''wiggles'' or pullbacks,and the buyer isnt in a hurry to cancel.
I am still confused. If I buy 1 call contract what position does MM have as a result? That would be my positition & not theirs. Can somebody explain it to me?
If you buy a call option and MM takes the other side then he/she will sell a call option. So you will have a long call and MM will have a short call.
Yes, I know that the overall MM's position is unlikely to stay just at short call, but I was talking in isolation, considering just that transaction. Otherwise, it is hard to say what will the MM's position be. 1 contract will be just "a drop in the ocean" so he/she won't even bother to do anything, but, generally speaking, the MM will hedge it in some way - i.e. long stock, spread or other....
I am still confused. MMs make money on differences between ask & bid prices. Meaning that if I am bying from MM at ask & he has to turn it over fast & sell it to someone at bid. The difference goes into his pockets. The key here is fast otherwise he is exposed to market price movements. The only way it can work if he has a lot of clients & he processes big trade volumes a day. Why would he want to hedge his positions by bying stock & paying comissions which would effectively decrease his bottom line? Hedging is a rather long term strategy. What I am missing here?
What you are missing is the fact that each specific option is not liquid. For example, if you are buying a 90 call on XYZ, it is not very plausible that there will be a seller of the very same option coming up in the near future. However, a market maker knows his risks in the form of greeks and can come up with a method to hedge this exposure via other options and the underlying. The way to think about it is that option contracts themselfs are not very liquid, however, greeks are liquid and trade frequently. Does that make sense?
This thread is interesting because the conversation shows how intricate and risky the marketmaker's job is.
Guys, I really appreciate the information you have shared. So in conclusion, after filling my position the MM will open their hedge to treat their sell to me as an independent issue. (me 1 pos / MM 2 or more pos) Some of you have suggested that the MM will not do anything against me (trying to squeeze me out of the position), specially if it's a big size ? I had always thought MMs are not just your friendly MMs, there only to provide a service, but had an inherent interest in taking your money.....manipulating the b/a or the underlying, specially in the case of low volume stocks. I must have been wrong then, if the MM are not doing the manipulation, then who is ? I know it happens. Thank you very much for any comments.