...What makes you think I make money with options? If I did I'd be on my sailboat in the bahamas with a couple strippers sipping on some pina coladas... not here trying to get a job.
I can't take it anymore. How many people in this thread lease a seat at the CBOE, ISE, PHLX, and are required to make markets as of yesterday, either as an off floor market maker, LMM, or DPM? If you are not one of them, stop answering questions about market making. Seriously, you are doing a great deal of harm by pretending to know what you are talking about.
The author clearly states that the data represents: "on average, three out of every four options <b>held to expiration</b> end up worthless" The key is that most options that have value are closed and are NOT held to expiration. That makes the data extremely misleading. Mark
Market making could mean two things: 1) Being a local at a floor exchange and just buying/selling options to profit off the bid/ask (usually there is volume in whichever options product). They work off basic supply/demand. 2) Being a firm that writes options (stock options, future's options, swapoptions, etc.) to clients. Of course these firms hedge themselves just in case the option goes against them resulting in a possible loss. They try to capture a smaller profit than just whatever they sold it initially. They hedge their positions with complicated mathematical formulas, with different models for most markets. You need to have a quantitative finance/computer programming background in order to work for these firms. In the US, Chicago is where the vast majority of option market maker firms reside. In Europe, there are a lot of Dutch firms that work in this business. What I mentioned in my first post is more relevant to the 2nd example.
Every pro option trader knows: you make money with options the same way they were originally intended for: you manage risk. (I know two full colons in one sentence is unusual.) You're either buying risk or selling it, but either way you're managing it, and if you are not understanding your risk, your blind to the vehicle you're riding.
I like this answer. though the 'consensus' may be that short options are "better", I think the premium has to justify the risk taken, otherwise (I believe) your expected value will be in the negative.
If there is one correct answer, for the institutional trader I believe it would be" by collecting the premiums".
You'll find there are quite a few current and former market makers here and most are happy to answer questions. The thing is we all have had our own personal expereince on the floor and in different products, which is to say there is more than one way to skin a cat. Each mm or mm firm will have some subtle differences even in the same products. From that respect there is no exact one perfect answer to your original question and options on different underlyings have ways which are more or less effective depending on the underlying. Some floors these days are 100% electronic and some are not, one thing is constant and thats the business is always changing, and that change has been pretty drastic over the last 10 years. Take em all with a grain of salt here there are a lot of people and a lot of egos but for the most part its easy to assess whats going to help you and whose just blowing smoke. Interesting question for an interview. Thanks for posting it!