Dealer Gamma (Institutional Options Market Making)

[Real Money]

It is called spoofing, and is illegal.

It's not spoofing Overnight. I'm talking about actual trading in the futures. These are completed trades here man. Actually, significant volumes of trading.

Spoofing is more of a hindrance for algorithmic traders that are using order flow. It's not even related.

I am referring to movement in the basis spread. The index basis 'floats' depending on demand for the hedging instrument, as well as fluctuations in the listed bids and offers on the underlying stocks. This is because futures and stocks trade within a no arbitrage spread most of the time.

These are charts of basis spreads. The upper chart is detrended, the lower is not.

For reference
https://www.cmegroup.com/education/...ndex-products/what-is-equity-index-basis.html

 

[tsfx]

Looking to start a conversation about institutional options market making.

What exactly is that you are asking ?

Does delta/gamma hedging matter ? Sure. But can you identify WHO bought and WHO sold options ? Who is going to lose the trade ? Dealers positions are the opposite of a clients positions.

 

[newwurldmn]

It's not spoofing Overnight. I'm talking about actual trading in the futures. These are completed trades here man. Actually, significant volumes of trading.

Spoofing is more of a hindrance for algorithmic traders that are using order flow. It's not even related.

I am referring to movement in the basis spread. The index basis 'floats' depending on demand for the hedging instrument, as well as fluctuations in the listed bids and offers on the underlying stocks. This is because futures and stocks trade within a no arbitrage spread most of the time.

These are charts of basis spreads. The upper chart is detrended, the lower is not.

View attachment 219409

For reference
https://www.cmegroup.com/education/...ndex-products/what-is-equity-index-basis.html

Are you saying you are seeing a noticeable change in the basis and you are attributing this to dealers hedging their gamma? If so, what about index arb and program trading?

 

[Real Money]

Are you saying you are seeing a noticeable change in the basis and you are attributing this to dealers hedging their gamma? If so, what about index arb and program trading?

This is what I'm saying. Read this statement (from the OP).

"Market Impact...option market-makers will hedge their positions in a fashion that stifles volatility (buying into lows, selling into highs)"

and then look at this chart Friday Feb 14 2020.

The white data series is derived from the Nasdaq and S&P basis spreads. I'm using the differential of the basis spreads against a short term EMA, and then summing the resulting series.

The algo/formula is something like this

SUM { BASIS - EMA[BASIS] }

The process tracks futures trading against the cash market. I think this is gamma scalping and that dealer gamma is driving it. Look at the chart. When the S&P moves, the basis shifts strongly against the move, which I believe is delta hedging, because of the OMM's gamma!

 

[tsfx]

This is what I'm saying. Read this statement (from the OP).

"Market Impact...option market-makers will hedge their positions in a fashion that stifles volatility (buying into lows, selling into highs)"

Do you have the information about dealer option positions ? how much puts are sold/ bought and how much calls are sold/bought ?


Isn't basis spread simply the difference in short term interest rates ? what does that have to do with delta/gamma of an option?

the difference in futures vs spot price is the interest rate. There is no arb.

 

[Real Money]

Do you have the information about dealer option positions ? how much puts are sold/ bought and how much calls are sold/bought?

This is dealer gamma.

Isn't basis spread simply the difference in short term interest rates ? what does that have to do with delta/gamma of an option?

The basis is the difference between the futures and the cash market. I use it to track futures trading, but now I believe that most of that is actually OMM hedging their deltas.

the difference in futures vs spot price is the interest rate. There is no arb.

The difference is called the equity index basis. Index Arbitrage occurs frequently, HFT facilitates that.

 

[tsfx]

This is dealer gamma.

I don't understand your answer to my question about dealer options positions.

The basis is the difference between the futures and the cash market. I use it to track futures trading, but now I believe that most of that is actually OMM hedging their deltas.

futures value = spot + interest rate.

what does that have to do with dealer delta hedging ?

The difference is called the equity index basis. Index Arbitrage occurs very frequently, HFT facilitates that.

Sure, by those who have the highest trading volume and lowest trading costs and lowest latency can harvest it. Do you have those criterias met ? It pretty much comes down to trading costs. There is no arb for the regular trader.

 

[Real Money]

futures value = spot + interest rate

There is a quant finance formulation of the basis (yours is wrong). If you can't read that then you really should learn how to. There is also a CME link to educational sources for the basis.

what does that have to do with dealer delta hedging?

Institutional options market makers are hedging with futures (among other things).

Sure, by those who have the highest trading volume and lowest trading costs and lowest latency can harvest it. Do you have those criterias met?

If you think I am claiming to trade basis spreads, then you really are confused.

Read the thread.

 

[Kevin Schmit]

The algo/formula is something like this

SUM ( BASIS - EMA[BASIS] )

Basis minus its EMA is equivalent to fractionally differentiating the series. Summing the results equals re-integrating it. You should end up roughly where you started with some smoothing and lag. WTF is the rationale behind this?

 

[newwurldmn]

Basis minus its EMA is equivalent to fractionally differentiating the series. Summing the results equals re-integrating it. You should end up roughly where you started with some smoothing and lag. WTF is the rationale behind this?

In more simple terms, the basis would only represent a deviation from the theoretical price. That would result from program trading, efp trades, futures rolls, etc. it would not be related to dealer gamma.