Basic options market maker question

Quote from dagnyt:

MMs do not charge a large premium. That is a common misconception.

The individual investor forces the large premium.

When the MM offers to sell options at $1.00 and buyers take what they have to sell, the offer moves to $1.10. When buyers take the offer again, the offer rises once more.

It's the absurd activity of the individual investor that pushes prices higher. They just buy and buy, never paying attention to price. Blaming the MM is foolish at best.

The MM is just defending him/herself. It's normal supply and demand. Keep in mind that when everyone buys options, the MM has no good way to hedge risk, other than to get delta neutral with stock. That is not a safe way to hedge a portfolio. Thus, prices are raised.

You think the higher prices are the MMs cheating the public. In reality, it's the MMs looking for people to sell options so they can reduce exposure to negative gamma positions. The only way to attract SELLERS is to bid higher for options. Thus, the public starts the demand for options and the MMs also want to buy options. Hence high prices.

Mark
http://blog.mdwoptions.com
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MMs may not charge larger premium but they do determine the size of the bid/ask spread.
 
You're not understanding what I'm saying... as a market maker you charge a premium in vol terms in the big ask for sensitive contracts.

Also I work as a MM... so I think you misunderstood where I was coming from haha.
 
Quote from Chelsea_FC:

You're not understanding what I'm saying... as a market maker you charge a premium in vol terms in the big ask for sensitive contracts.

Also I work as a MM... so I think you misunderstood where I was coming from haha.
More...

crook. kidding, what you said makes sense.
 
Quote from dagnyt:

MMs do not charge a large premium. That is a common misconception.

The individual investor forces the large premium.

When the MM offers to sell options at $1.00 and buyers take what they have to sell, the offer moves to $1.10. When buyers take the offer again, the offer rises once more.

It's the absurd activity of the individual investor that pushes prices higher. They just buy and buy, never paying attention to price. Blaming the MM is foolish at best.

The MM is just defending him/herself. It's normal supply and demand. Keep in mind that when everyone buys options, the MM has no good way to hedge risk, other than to get delta neutral with stock. That is not a safe way to hedge a portfolio. Thus, prices are raised.

You think the higher prices are the MMs cheating the public. In reality, it's the MMs looking for people to sell options so they can reduce exposure to negative gamma positions. The only way to attract SELLERS is to bid higher for options. Thus, the public starts the demand for options and the MMs also want to buy options. Hence high prices.

Mark
http://blog.mdwoptions.com
More...


Mark -about ur post .
"Keep in mind that when everyone buys options, the MM has no good way to hedge risk, other than to get delta neutral with stock. That is not a safe way to hedge a portfolio. "

what is there is results after hours and at the last few seconds of trading. someone comes in and buys a huge Qty of options. what does the MM do. . since there is no time left to attract sellers, how do they reduce exposure.. hedging with stock is not a good way. as , that exposes to infinite theoritical losses.. This definitely must be complicated,: all unbalanced trades.. matching buyers with sellers and taking the spread , does that profit help offset the losses by wild swings for the unbalances unhedged positions?
 
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