Who has floor experience?

I am in talks with a few firms who are floor based and I am in talks with them about a clerking job on the floor next year. I have a few questions though for my personal options trading benifit and to be more well rounded when I step into the pit. If there is anybody on et that has either worked on the floor as an options local or is very knowledgable about the subject please feel free to chime in. Thanks in advance guys.

First how do locals come up with a bid/offer when trading from the pit? They don't have theoretical pricing models with them at all times do they? All I ever see on them is "the sheets" I have heard of the sheets before but am not exactly sure how they work or how locals come up with bid/offers for options using them.

When you call the pit to get a bid/offer on a particular option or spread is the bid/offer you get the average bid/offer of all the locals in the pit or is it the best bid/offer on the floor? Do all locals usually bid/offer at the same prices?

Is there any way to tell which side of the quote the local is taking most edge? I mean say I want a quote on a 115/118 call spread and I want to buy it. Well say we are looking bullish on a chart and the fundamentals are also bullish on this market so probably most of the paper coming into trade that spread is buying. However I can't be sure so is there anyway you can tell that the market maker is inflating offers or something along those lines?

Any other information you guys can provide about making markets in the pit would be great.

Thanks Again

YT

 

1) Locals have sheets with option values based on recent volatility levels. If the sheet has a theoretical value of "20" for a particular option, the local can bid & offer relative to that value, i.e. "19 bid, at 21", "20 bid, at 22" or "19 bid, at 20". There may even be some type of wireless transmission capability where locals can receive continually updated values on a PDA-like device without relying on paper sheets.
2) If a market becomes volatile or moves far away in a session, a firm will reprint new sheets with adjusted volatility levels in order to keep their traders "on the market".
3) Highest bid & lowest offer "make the market".
4) Lopsided bid/offer sizes can indicate a "bias" for an option.

 

dont you see locals with tablets around there neck? they are seeing realtime theos and greeks and hedging in the electronic market

 

Sheets for the most part have been gone for a long time. Most MM's have hand helds with real time variables set by the people who manage the firm. They're not exactly expanding staff's on trading floors these days LOL.

 

YT - which floor are you on? I'm told sheets are still in vogue in futures option pits.

I'm attaching a simple theoretical value sheet (usually called "delta sheet") for crude oil. If at a given moment crude is trading at 140.05, then you use that row to make markets, and ignore the rest of the sheet.

The is a "flat" sheet, with all options calculated with the same volatility. In reality, most sheets use a different volatility for every strike.

Here's your first lesson YT - you're in crude options. Futures are trading at 140.05. You buy 100 of the 131 puts. You turn to the futures pit to hedge your deltas. What order do you put in? In other words, what do you have to do in the futures to hedge your deltas?

 

The best bid and the best offer are the only bids and offers that count. The locals don't all necessarily agree, but if the best bid is 3 and you're a local who only wants to pay 2, you don't have the right to voice a 2 bid when there is still an active 3 bid.

The exception is when a broker is reporting to a big customer, who normally does big size. Imagine all the "size" locals in the pit are 3 bid at 6. One small local (who usually only does 10 lots at a time) is 4 bid. The broker will report "3 bid at 6 for size, small 4 bid."

 

dmo

More than likely it will be in eurodollar options at the CBOT.........and to the guy who said they aren't exactly expanding floor staff......eurodollar options are almost 100% open outcry and trade close to 1 million contracts a day in the pit! That pit will be around a while imo.

dmo I can't seem to bring up your attachment but wouldn't you go into the crude pit and buy futures equal to the total delta (so if the total delta of the 100 puts is 8000 you would need to buy 80 futures to be delta neutral).

Do you work on the floor?

 

Right. The delta on those puts was .31 so you'd buy 31 futures. Newbie question but hey, you said you're a newbie!

ED options are very actively traded electronically too - I believe they are THE most traded electronic futures options.

YT - ED options (and futures) are set up and calculated in a unique way. If the futures are at 93 and you want to calculate the value of a 93 call, you cannot use a standard model and simply use those inputs. That's important for you to know if that's where you're going to be working. Do you know what I'm talking about?

To answer your question - I was on the floor of the CBOT and CME some many moons ago.

 

I am the guy who said they're not expanding. The guys on the LIFFE said the same thing nearly a decade with the Bund futures and options. Eventually the LIFFE went to a hybrid system which lead to 90% of the volume going electronic in a short period of time. The CBOT / CME has members who are fighting to keep open out cry and they've done a nice job but time and technology will march on.

 

When you are trading these options day in day out you will know the flow and know if vol is bid or offered
IF you don't notice it you will soon see it in your position