Pls help me understand option market making

Hi opt

What retail size is acceptable to locals and Eurodollar options pit traders to trade with ? is the 1 and 2 lots acceptable , do brokers bid and offer there clients limit orders to the locals ? thanks

 

I would answer your questions if I could, but I was an equity options market maker, not a futures options one, and of the things I trade now Eurodollar options is not one of them. Just in general though, I don’t think anyone is going to care about 1 or 2 lots, you would just have to stick your order out there and see what happens. Every futures options pit has its own personality and you have to learn as much as you can about it before sinking too much money into it. What you can do in the Euro or ES would never work in Wheat or the NQ.

 

Thanks opt

I asked u this because sometimes there is some room between the bid and ask on the globex eurodollar options , and the volume for the floor is nearly ten times so i guess i could be filled between the bid and ask on the floor and then exit on the screen by limit orders .

 

when I clerked in the euro$ options pit, there was one broker who would almost politely ask some market maker to take his retail 1 or 2 lots. i think a lot of times a market maker would just wave him off, the broker filled it at whatever the customer's bid was and the transaction was complete.

understand, it's a big pit, and if paper is trying to do 40,000 of some package, would you really waste time with a 1 or 2 lot?

 

electronic option market making is basically this:

(1) stream quotes (meaning, join the bid/ask up and down the entire options chain).
(2) if hit on something, auto hedge.
(3) maybe update your vol.
(4) print a "run" to see where your risk is.
(5) maybe aggressively bid at the monies to take off some vega.
(6) on and on it goes.

 

(2) is done with the underlying I suppose? Do option market makers face typical short restrictions like the uptick rule and also the T+3 rule?

For (5), I assume you're either buying sufficient ATM calls or puts and then doing (2) again when you're filled, is this correct?

Thanks.

 

(2) Yes, with the underlying.

If you're make markets in futures options, no, you don't have short restrictions.

If you're making markets in equity options and are a designated market maker in a set of symbols, you're not held to short restrictions.

We do not have an uptick rule in the US (at the moment).

T+3 is a non-factor.

Right, if I buy 100 atm calls to take care of some Greek risk, I need to sell 50 shares of whatever stock it is.

 

No matter who you are you must be able to borrow the stock that you are shorting.

 

not necessarily true. one example, ETFs (whether you consider them a stock is another point entirely). you can be an LMM in a particular ETF and short until you're blue in the face.

 

Thank you very much for the insight. This has definitely helped me to understand things from a MM's point of view.