any books or web pages on how MM activity during expiration weeks actually work

[scriabinop23]

basically, I never hear the end of info about how MM's manipulate stock prices to make sold options expire worthless.

How does this ACTUALLY work? I am also curious how market makers provide liquidity to options as well. If I wanted to buy 1000 OTM calls on a stock that I knew was going to imminently get bought out, how would the MM protect against a collosal loss? Do they offset all sales with stock purchases or by holding spreads?

The whole thing seems bewildering, and I'm sure an options MM (unless this is all automatically electronically done) could explain how this whole thing really works.

Furthermore, price manipulation is expensive I would assume. Anyone know the story? Do MM's recklessly sell whatever the market buys from them, then start covering their asses before expiration by buying/selling stock, then unload these temporary positions the following week?

 

[Optionpro007]

There is a book, haven't had a chance to read it, and I believe it was riskarb who recommended it to me, not sure.

It's called Option Market Making by Allen Jan Baird.

 

[MTE]

Quote from optionpro007:

There is a book, haven't had a chance to read it, and I believe it was riskarb who recommended it to me, not sure.

It's called Option Market Making by Allen Jan Baird.

Great book, I highly recommend it.

scriabinop23,

Read it, it'll answer your questions. Btw, market makers do not manipulate prices! And, yes, market makers usually hedge their deltas, however, they obviously do not hedge every trade they make. They manage their total book via greeks and hedge when the total book gets out of line. Also, have a look at "Market Wizards" book, I think it's the second one, there's one chapter that mentions market making.

 

[scriabinop23]

Quote from MTE:

Great book, I highly recommend it.

scriabinop23,

Read it, it'll answer your questions. Btw, market makers do not manipulate prices! And, yes, market makers usually hedge their deltas, however, they obviously do not hedge every trade they make. They manage their total book via greeks and hedge when the total book gets out of line. Also, have a look at "Market Wizards" book, I think it's the second one, there's one chapter that mentions market making.

ordered.

so where does the idea of price manipulation around option expiration come from? And what is the erratic activity likely from if not the market makers? (hedge fund premium sellers?)

i guess there are times when it costs less to manipulate the price than let your short positions expire in the money. (like when you have 10k short positions in the money)

 

[GATrader]

Read Taleb's books. Look up "sticky" strikes. His premise is that the sticky strikes happen when there is an inordinate amount of open interest in one of the strikes and a good portion of the OI is sold by "somebody" who is not interested in gamma scalping position which leaves the longs equalizing their deltas buy buying low/selling hi which pin's the stock near the strike.