Yes, there are ways to try and piggy-back on these insider trades. See the Najarian's optionmonster site. That's what they are trying to do. They look for big-block volume surges, along with a transaction happening on the ask (implying someone big just wants in, without bargaining for a good price). I subscribed for about 4 months or so...somehow their track-record managed to suck...you'd think they'd hit a bunch out of the park, but that didn't seem to happen enough to offset the positions that lost everything. I started trying to game the advisory itself...but couldn't devote enough time to get it right with a day job.
or you could just find out what 'office cleaning companies' service the goldman office every night and get a job there....execute the Bud Fox/Gordon Gekko insider trading strategy.....probably easier than studying every OTM option.
They typically only delta hedge? I would have thought that, based on their position as a MM, they could profitably leg into a conversion/reversal? Such as: an unknown party wants to buy 1000 OTM calls on FDC. Timber Hill quotes them the (now inflated) price of $XX (current quote is only good for max 10 options?). TMBR only has 200 in inventory, so they need to hedge the rest. Included in the $XX call quote is the price of legging into the conversion (buying the stock and puts, cost of carry, divs, whatever). So maybe they sell 200 from their own inventory and do a conversion on the rest? FDC gaps up 20% in two days. No big deal, TMBR is totally neutral. This is probably too simplistic, or just plain wrong, and doesn't work in the real world of market making. Can any market makers out there 'splain this stuff to us poor retail schlubs? Good trading to all.
Wayne, who do they buy the puts from to do the conversion? They might as well just buy the calls back. I am guessing they typically use a delta hedge which works fine in most cases and can be adjusted in most cases.... except when the stock gaps due to a buyout or some other major news, in which case their delta hedge will help offset their loss, but not cover it. But heck, who knows wtf they do? Given the huge volume of transactions (they boast 20% of total option volume) and their low overhead, most of it is automated, right? If you want to follow unusual option activity, here is website: http://www.schaeffersresearch.com/streetools/filters/volume_exp.aspx Unusual Daily Option Activity
Yeah, I wondered about that too. But my head hurt, so I gave up. I guess market making or being a floor local, or the like, isn't an automatic road to riches. Still plenty of ways to screw up (and get screwed). Good trading.
here is my theory: most takeover stories are false in the short run. remember how many times Quaker Oats was being taken out before it actually was. I seem to remember that story going on for like six years. A well capitalized MM will always be a seller of premium in those situations and usually be right just like a well capitized insurance company will be a seller of risk and usually be right. This year we had a Katrina so to speak in that alot of rumors actually came true but overall they make more selling premium then they lose. This is particulary true as so much more MM activity is being done by the Timberhills and Peak6's of the world and not by small floor locals.
The problem with the statistical arbitrage method the market makers use to write OTMs is that they are vulnerable to volatility. We've had a year with several large takeover announcements that created risks that could not be hedged out by their business model. Instead of admitting this flaw they'd rather create an explanation that uses insider traders, ghosts and other types of unsubstansiated claims as a way of dealing with a vulnerable business model.