Hedge Funds Invade the Options Markets

That is an absurd premise. Who the hell wastes their time trading 100 delta options? Unless you can get your options for less than parity, it's not worth the hassle.

I don't have an answer to the hedge fund question. Logic would dictate that, if there "is money in them thar hills ," then other hedge funds would have already followed Citadel's lead. The fact that they haven't shows one of three things:

1. They aren't sophisticated enough to make markets in options.

2. There isn't much money in options market making anymore.

3. Citadel is using their liquidity providing to mask some other activity that is the actual source of their options revenues, perhaps trade crossing.
 
The options market, taken as a whole, is indeed zero-sum. I don't see this as a debate. The definition of zero-sum, according to wikipedia:

Zero-sum describes a situation in which a participant's gain or loss is exactly balanced by the losses or gains of the other participant(s).
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The first stipulation that must be made is that the market is looked at independent from other markets and transactions. While one may be trading exchange options against physical or OTC positions, these must be ignored to isolate the exchange-traded options market.

Now, we can start by simplifying the market down to two participants. For any transaction to occur, one must sell to the other. This transaction would only occur (assuming rationale actors, which is not a safe assumption although on average will hold) if both participants felt the transaction was to their own benefit. So, since each feels they are benefiting, the net benefits outweigh the net costs - this is not a zero-sum event. In fact, this should hold for almost all transactions of this type.

However, after eliminating non-monetary benefits and costs, focusing only on the dollars changing hands within the options market (ignoring commissions as these are exogenous, obviously including them would make this a negative-sum game), all dollars gained within the market should equal all dollars lost. We can see this with two participants (or even three to make it mentally easier to extrapolate) that any money gained is lost by some other participant. Therefore, the market, as a whole, ignoring non-tangible and external benefits/costs, is zero-sum on an accounting-profit basis.

The equities market, on the other hand, is not zero-sum when looking at accounting profits. However, when one considers opportunity costs (which may not be fair as these will be external to the market) it can also be misconstrued as zero-sum (this would be the economic-profits sense).
 
Quote from archon:


If making markets in options is so profitable for Citadel, then why aren't other funds getting in on the action?
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you don't know if its so profitable. however, by making markets they now know the order flow and can use that information in other areas.
 
The assumption is that it is profitable, otherwise why would they stay in the business?

You don't need to be on the floor to get access to order flow. In fact, market makers are frequently the last people to learn about big orders.

Most significant options orders, and quite a few of the insignificant orders, are shopped repeatedly before they ever hit the exchange. A large customer like Citadel would be shown all of the important orders in advance of any liquidity provider, giving them better access to order flow than a market making firm. So access to order flow can't be a motivation here. It' must be something else...
 
Options ARE A ZERO SUM GAME (ignoring commissions).

Example:

I write you an option, a 20 put on INTC.

You have 100 shares of INTC, that you bought at 22, you wanted the protective put.

You paid me a $1.00 premium for it.. at expiration, INTC is at 30.

So you have $700 gain total

I have a $100 gain total, because the option expired worthless.

On the OPTION SIDE, IT IS STILL A ZERO SUM GAME, EVEN THOUGH YOU PROFITED, YOU LOST $100 ON THE OPTION END OF IT!!!

We can also look at this on the other side.

by expiration, INTC goes bankrupt and is worthless. the puts get exercised.

I'm $1900 in the hole (2000 exercise for worthless stock - 100 premium collected), and you're $300 in the hole, we both lost, but again, on the option side, you gained $1900 because you saved yourself that huge loss, which makes it a zero sum game
 
I think he was trying to point out the existential relationship between call buyers and...


...oh the hell with it!!! Even I can't pretend that post made any sense.

:p
 
Quote from Hydroblunt:/archon


Market makers get order flow. 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.
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=====================
And if you like expiry daytrades;
Futures magazine[futures,options,stock traders], had a penny priced daytrade. Its April issue,page24.

They are'' barking up the same tree'', basically;
selling same numberof MSFT puts, same number of MSFT calls expiry day.

''Requires considerable margin '', but based on historical data,high % winner.

And this may or may not affect this type of expirations friday daytrade;
but noticed high percent trades may not not work briefly,
after publication/announcement.


:cool:
 
Options are not a zero sum game if you look a bit further than just their own market: for example both buyer and seller of an option can win. For example the buyer buys calls because of a directional play, the seller sells calls because of a volatility play, thinks those calls are too high priced and immediately hedges them delta-neutral. What happens: the stock goes up strongly, making the calls deep in the money and valued at more than their original buying price, but realised volatility turns out to be lower then implied volatility at the time those options were sold. End result: both parties, buyer and seller of the options win.
 
Wow!!!! I can't believe another zero sum argument started. Why don't you all use the search function and find the other hundred zero sum threads and read them.

Anyway, it doesn't really matter whether it is zero sum or not. Are you net positive each year or net negative? That is all that matters. All the cliches in the trading world are pointless.

"Options are zero sum."

"80% of fund managers underperform."

"Cut losses short and let winners run."

"Buy low and sell high."

"Options are more risky than stocks."

Man, I should right a book on the myths and misrepresentations in the financial world. Completely worthless statements and advice.

A word on options trading vs. stock/futures trading...

There are a bunch of big funds and managers out there who bag on options traders saying they are playing a losing game. Buffet himself criticizes options, but his last statement was that he currently has 64 options positions and manages them all personally.

Fact is that many of the same people who are critical of options traders are completely ignorant of what they are saying. Pretty much any position they carry in their portfolio can be created synthetically with options using less buying power/margin and thus allowing for better growth.

Large institutions love collars. We call them vertical spreads. They have the exact same r/r profile in $ terms. The difference is that the option version (especially for the retail trader) ties up much less buying power. In other words if we are both retail traders and I like to trade collars while you like to trade vertical spreads. You will only utilize about 10% of the margin that I do. So if you were to take the residual 90% and invest in money market instruments, your yearly returns will beat mine by about 5%.

Same goes for covered calls, buy/sell strategies, etc. The game is about getting as much as possible, for as little as possible, in terms of both buying power and risk. Options allow that. They are simply a more efficient way of shifting money that would otherwise be in the stock market, and IMO they are the most efficient method of smoothing out your r/r profile. They've gotten an incredibly bad name from ignorant people using them incorrectly.
 
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