Yes and no. There are always plenty of n00bs to sell premium to.
There's nothing very sexy about risk management or capped profits, but it sure as heck beats unhedged equities, no?
Hedge Funds Invade the Options Markets
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Yes and no. There are always plenty of n00bs to sell premium to.
There's nothing very sexy about risk management or capped profits, but it sure as heck beats unhedged equities, no?
Read the article again:
http://www.theoptionsinsider.com/industry/?id=127
What I was saying is that many specialist firms like Knight have gotten out of the options market-making business entirely in light of the terrible margins and high risk. Some of these firms have now switched business models entirely to develop execution systems for customers. Alternately, others have established what are known as "preferenced" or "directed" trading relationships with order flow providers. These allow them to purchase order flow and route it directly into their accounts, allowing them to cherry pick order flow and reduce their risk substantially. I'll look around the web and see if I can find some articles to clarify this for you. However, my original point was that the comment about margins being very high in the options business isn't accurate when placed in the proper, risk-adjusted context.
http://www.theoptionsinsider.com/industry/?id=127
What I was saying is that many specialist firms like Knight have gotten out of the options market-making business entirely in light of the terrible margins and high risk. Some of these firms have now switched business models entirely to develop execution systems for customers. Alternately, others have established what are known as "preferenced" or "directed" trading relationships with order flow providers. These allow them to purchase order flow and route it directly into their accounts, allowing them to cherry pick order flow and reduce their risk substantially. I'll look around the web and see if I can find some articles to clarify this for you. However, my original point was that the comment about margins being very high in the options business isn't accurate when placed in the proper, risk-adjusted context.
ANY market maker does proprietary trading and is always in conflict of interest. Exchange floors were built on that premise. You really think Knight does not place positions based on order flow? I know for a fact they do, an old buddy of mine worked there and did exactly that.
A pure market maker will just focus on the spread more than placing positions. A hedge fund has to put capital to work so they will take more outright positions.
By the way, I have noted that in the last 2 years, a lot of the smart NYSE tape readers moved on to tape read options instead. Lot of human tendencies to be read, lot of shakeouts & games. There are some interesting strategies too.
Actually, Knight can do whatever they want since they are essentially out of the options market making game. They saw the writing on the wall years before anyone else did.
As for trying to read the tape in the options markets, I wish them a hearty GOOD LUCK!!! Trying to trade paper flow in options is a fool's errand. Options are not a zero sum game like stocks. One guy can buy a call and one guy can sell that same call to him and they can both be right and make money. It's a question of hedging, existing positions, etc. So looking at the tape, seeing 10,000 calls trade then assuming that the buyer thinks the stock is going up is a fool's errand at best. But more power to anyone who thinks they can make money doing that. If they can succeed, then they'll be the first.....
Um... you're confused. Options ARE a zero sum game, they have to be - each options contract has someone on the other side of it. The stock market, however, is not a 0 sum game, since all longs are not matched by shorts.
I was pointing to Knight as an example of a MARKET MAKER, not necessarily as an options maker, which I did not even know they did. Only reason I mention Knight and not some big bulge bracket firm is because I know someone who worked there and leeched off order flow.
Market makers get order flow. Then they piggyback it. They also have control over the fills. Hence the spread. Does not matter what instrument.
Yes, you can tape read it. However it's more advanced. I've had a quick explanation of it, or really, the guy was telling me how he intra-day traded options. He basically read the bid/ask & prints, but that was only part of the whole trade. It made perfect sense to me.
It's not as simple as tapereading the same 5 NYSE stocks day in and day out, it's quite more evolved. The tapereading is only part of the strategy but it's significant and can give you that edge over the rest.
Option MMs play many games on which you can pick up on. When a relatively inactive OTM call is seeing some need from a retail trader, the MM starts playing games. I've been there and have been screwed. But I had to experience it to fully see it.