If I buy 1K calls on ZYX stock, how do MMs hedge their pos?

Discussion in 'Options' started by Optionpro007, Aug 27, 2005.

  1. sle


    After all, MM is yet another trader in the market and will do what all traders do. In presense of a barrier, literally a knockout barrier, a P&L boundary or something of that sort, he certainly will. Most probably it's going to be at a global level (i.e. you are long skew, MM will short skew untill you are forced to sell), but on far OTM options you will see differential B/A quotes, especially in OTC markets.
    #21     Aug 28, 2005
  2. Thank you for your input sle.

    That is one of the reasons why I feel ITM options are less risky. I only trade DITM options now.

    In case it could happen, MMs moving the underlying against me, (in the case of a very lg pos) is there anyway of knowing if the move in the underlying is coming from a MM squeeze ? Like for example if an unexpected strong move happens a short time after I open the pos. Should I consider this a squeeze?

    Are these guys sooo loaded that they can sustain or extend price for a long time? I don't think can, not more than a few days max I hope.

    Excuse me guys for asking so many questions, but don't know where else I could get this information.

    This year I have been whipped several times. I wish I would have been prepared becuase price went exactly where I knew it was going to go....and it did the minute I closed my position....
    And I don't think that was just bad luck....

    I really appreciate your time and generosity of thought reg this subject :)
    #22     Aug 29, 2005
  3. jim c

    jim c

    I think for the most part you are being paranoid. I work for a MM firm and i do the hedging for about 20 traders in the s&p indexes. Unless you are doing some real size they are not watching you that close. As someone said earlier the large orders are usually split up between a few locals. One thing to ba aware of is "the fade". If you come into a pit and keep buying the same strike over and over and do it with some size and frequency the floor will figure out your position. So youve been doing this call spread all monthand now the time to unwind or roll this spread out the MM are gonna know this and fade your market the wrong way.Ifthey know you have to buy this spread back they are going to back off their offers and firm up the bid a little to make u pay up on your spread. This can sometimes work against them if they fade the wrong way. This is one of the only ways I think a MM can get to ya. Most importantly the MM is there to make money...not friends. Good luck and good trading. Jim
    #23     Aug 29, 2005
  4. Thank you very much Jim.

    In the case of a directional trade, if I buy 1K DITM options all at once with 3 to 6 months to expiration. (The floor knows my position right away) What could I expect them to do, if anything ?

    Thanks !!!

    #24     Aug 29, 2005
  5. They'll skew the market in the DITM, but it's really not an issue. You'll know whether the market is fair via p/c parity and the pricing of the same-strike put. Calls are puts, puts are calls.

    This is a circumstance you'd ideally want to be in[swinging 1000-lots]. :D
    #25     Aug 29, 2005
  6. jim c

    jim c

    No one is going to keep track of that and it depends alot on how the order is executed. Actually where is almost as important. More than likely your order will be executed electronically where you will see the bid offer and know right away if you wanna play. I am referring more to a large order that is executed via open outcry. For instance "Goldman checking the 1210. calls again in here again. Theyve been a buyer the last 4 times theyve checked it." The MMs tend to back off the offer a little when they make the market this time. It happens more when it comes time to roll a large position that someone has been accumulating over a few weeks or months. You know his hand for the most part and which direction he will be going so you make your markets accordingly. All in all I dont think you have anything to worry about. Some big players have the same strategy that they employ month after month and these are the ones they try and fade. Sometimes fading a market will get you in trouble if he turns out to be a buyer instead of a seller or whatever the case. Hope that makes some sense. Jim
    #26     Aug 29, 2005
  7. Jim and Riskarb. Thank you indeed.

    Next time something happens that I feel was not "normal"I will bring it to your attention for your comments.

    I am not trading 1K lots yet. But that is where I am going to.

    Good trading to you all!!!
    #27     Aug 29, 2005
  8. Great post!

    Very true.
    Just ask Timberhill, Susquehanna, O'Connor, etc.
    #28     Aug 29, 2005
  9. I thought O'Connor had no proprietary trading in options - they just clear options trades. Did you mean Wolverine (which does have a lot of mm's and it's all hedged by computers upstairs), or are you sure O'Connor does proprietary trading for its own account?

    #29     Aug 29, 2005
  10. Option Market Making, by Allen Baird.
    #30     Aug 30, 2005