Can anyone recommend a book written by an option market maker on how they actually make markets? I thought it would be an interesting read.
Here is a book that someone posted on another thread a few days ago : http://www.amazon.com/Option-Market..._bbs_sr_1/102-0037866-9725733?ie=UTF8&s=books Its a bit dated, but I requested it from the library so if its useless the most I am out is my time. I'm going to pick it up today. I'll post later once I browse through it.
try "the business of options" by O'connell and "the hidden reality" by cottle... I'm re-reading Baird's book at the moment.. and am getting so much more from it second time round. its certainly not dated.
Google "dagnyt" he was an options mm, wrote a book. He posts on the Yahoo boards. He'll answer any questions.
Take a look at my market-maker series of articles that I wrote for the website www.smartoptionsreport.com I was an option market-maker on the NYMEX for 6 years in the crude oil and nat gas options pit. Enjoy http://www.smartoptionsreport.com/Archives/2005/20050502.html http://www.smartoptionsreport.com/Archives/2005/20050910.html http://www.smartoptionsreport.com/Archives/2005/20050920.html http://www.smartoptionsreport.com/Archives/2005/20051004.html http://www.smartoptionsreport.com/Archives/2005/20051020.html http://www.smartoptionsreport.com/Archives/2005/20051104.html http://www.amazon.com/Get-Rich-Opti..._bbs_sr_1/002-1043344-0420856?ie=UTF8&s=books Regards, Lee Lowell
Lee thanks for that- I stumbled on your website last night and was reading some of the articles. Its seems pretty interesting. How much power do the MMs have to pin an underlying to a strike on expiration? Look at NBR today which was totally pinned to the 30 handle all day and I'm guessing the option MMs had a hand in this.
My assumption -- and someone who is a pro, please correct me if I'm wrong -- is that heavy OI at particular strikes creates a situation where unloading of MM hedges (long and short stock, long and short calls and puts) and retail holders closing positions naturally moves the stock towards the strike. A serious amount of volume, particularly this week, is related directly to options trading. Look at open interest and volumes today on AAPL and GOOG - I'd bet easily 70-80% of the volume today was related to options position closing. If I want to sell 100 calls to an MM, that trade could easily stimulate the sale of 10000 shares of the underlying by the MM. Just think of all the longs unloading their Feb 85 AAPL options this month (in anticipation of pinning and quick theta decline) creating underlying selling pressure that may have not necessarily existed at these price levels without the options market. I think that type of psychology drives stocks towards the strikes too.
Options market makers have precious little control over the underlying. I can think back to many expiration weeks on the trading floor when everyone in my pit tried desperately to keep the stock from pinning, always to no avail. If you want to look at the true power centers for moving the underlying, they you have to look at the institutional paper flow. No matter what the market makers want to do, a 10,000 lot from Goldman Sachs will always trump them.