The retail edge?

Discussion in 'Options' started by jj90, May 4, 2006.

  1. jj90


    After reading a bunch of posts on ET with a healthy dose of skepticism about how the floor is losing their edge, I have to ask to those who have floor experience, is this remotely true? And if so, where is the power of being retail coming from?

    The posts I have read (I don't remember the threads), generally indicate with decimalization, the bid/asks have shrunk significantly. Also, with the computers using pricing models and doing most of the market making, there isn't much use for the floor trader.

    But the floor still has the edge no? Retail still can't buy on bid, sell on ask unless price changes even in the most liquid options. And even if the spread was 1 cent, that's still an edge. Who would leave free money lying around?

    On a slightly related note, how exactly do these program MMs work? Do they try and capture the spread, or simply post the bid/ask? Given an bid of 2 and ask of 2.1, would these computers take my ask of 2.05, if I was exiting a position, just to make the market? I know a floor trader wouldn't take that because he would have no edge at the midpoint. Do they just provide liquidity or are automated versions of humans?

    This question is for those who have worked on the floor. Other then the b/a spread, where else do MMs make their cash? Are they allowed to take positions independently or just profit off the spread + get flat before the close.
  2. cvds16


    it's much more complicated then just taking the spread: most options are not that liquid so you have to deltahedge, which makes no edge if there is a spread like 1 cent when you take costs into account ...
  3. don't think it is always that easy for floor traders to scalp da spread...there's obviously a lot of competition between 'em for juicin'n'da quickest will get it; they prolly can do it many times durin' da session but not all da time, innit[?] otherwise they wud be exclusively doin' that all day long'n'there wud be guaranteed free $money$ for 'em fallin' from da sky: bs.
  4. cvds16


    and i forgot one more thing: option prices are no certainty, if you estimate your vol wrongly, your vega will cost you lots and lots of money. Vice versa: it's not because you make money that the mm is losing money ...
  5. rosy


    i think retail can make better bid/offers and it gets shown to everyone. As far as MM, its automated now and a guy monitors/adjusts the programs. no clue what the floor edge is.
  6. Still don’t think I can bid on puts at .10 under parity on expiration day, can I?

    Say stock at 48, ITM puts at 50 with lots open interest. Bid on those puts from the MM will be $1.90. He’ll buy puts, buy the stock, immediately exercise and make .1 per share.

    Let’s say I’m completely liquid and bored on third Friday. I want to get in on the party, even though I’ll lose almost half of the .1 in commissions. I would enter a spread order to buy the stock and the 50 strike puts for a net debit of $49.90. Problem is, I don’t think my order will ever make to the exchanges, will it?

    I could put in a limit order on the puts for $1.90, but I want it to track as the stock bounces around. Otherwise, the stock will go up .1 and I’ll get filled at parity, or worse!

    Anybody know another way to get into the expiration day dime whacking game?
  7. cvds16


    it can be done, problem is you won't be alone