How do Market Makers determine the Option Price in binary Situations?

Sig said:
I guess I didn't understand your point then. I thought you were saying that exploitable arbs occur in real life when professionals are so fully invested they don't have another dollar to take advantage of them. That doesn't happen, but if that wasn't your point then I guess it doesn't matter.
There aren't any professionals investing in penny stocks, so I'm even more confused by the reference to pump and dumps?
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What I try to explain is the fact that markets are not moved by math, models, or no arb criteria.
It's driven by inventory constraints of all participants. This leads to severe mispricings that can be visible for everyone and really persistent.

If you know how to price assets you have a ton of opportunity that does not rely on expensive infrastructure or manpower to exploit.

The options arb was just an exaggeration, yet in 2008 my main profit driver was buying options calendar spreads for a credit or at even. At IB with retail commissions.

Low floaters are not covered by instutitions which is the reason they are so inefficient. When a business plan, a coffee machine and two weed farmers with zero revenue are suddenly worth millions everyone knows it's BS yet the stock is soaring.

The stock move is sparked by shorts getting killed, market makers trying to evade the pain and margin calls of course...basically inventory control at it's worst.
 
MrMuppet said:
What I try to explain is the fact that markets are not moved by math, models, or no arb criteria.
It's driven by inventory constraints of all participants. This leads to severe mispricings that can be visible for everyone and really persistent.

If you know how to price assets you have a ton of opportunity that does not rely on expensive infrastructure or manpower to exploit.

The options arb was just an exaggeration, yet in 2008 my main profit driver was buying options calendar spreads for a credit or at even. At IB with retail commissions.

Low floaters are not covered by instutitions which is the reason they are so inefficient. When a business plan, a coffee machine and two weed farmers with zero revenue are suddenly worth millions everyone knows it's BS yet the stock is soaring.

The stock move is sparked by shorts getting killed, market makers trying to evade the pain and margin calls of course...basically inventory control at it's worst.
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First I think you're talking about two fundamentally different things. A worthless penny stock defying gravity is probably due to the fact that there's no shares available to sell short. Which means that a retail trader (or any trader for that matter) can't capitalize on it because the either can't locate a short to sell or the interest they pay on their short is massive such that the amount you pay out in short interest is commiserate with what you make when the thing eventually crashes. There's no situation there where someone's run out of money and a wise retail trader can swoop in and get something less than risk adjusted return.

As far as something like a calendar spread you can trade for a credit, again that's a claim of seeing a unicorn which will require some screen shots to be taken seriously. Generally when someone honestly claims this, which I have not doubt you're doing, they're either not aware of a risk inherent in the position and just got lucky they were never whacked by it or they're mistaking the cost of money as a risk free arb (I can buy an SPX box for less than parity right now, the delta reflects the interest between now and when it closes). I'm just going to say I don't believe it's possible that anyone ever successfully does a COB order for selling a stock X strike Y June call at $1.05 and buying the same stock X at strike Y July call for $1.00 which is what it would take to really have an arb on a calendar spread. You might be able to leg into that, you might be exposed to a dividend risk you weren't aware of, but that just doesn't happen in a risk free manner let alone happen regularly enough to make it a strategy. Would love to be proven wrong on that though.
 
Sig said:
First I think you're talking about two fundamentally different things. A worthless penny stock defying gravity is probably due to the fact that there's no shares available to sell short. Which means that a retail trader (or any trader for that matter) can't capitalize on it because the either can't locate a short to sell or the interest they pay on their short is massive such that the amount you pay out in short interest is commiserate with what you make when the thing eventually crashes. There's no situation there where someone's run out of money and a wise retail trader can swoop in and get something less than risk adjusted return.

As far as something like a calendar spread you can trade for a credit, again that's a claim of seeing a unicorn which will require some screen shots to be taken seriously. Generally when someone honestly claims this, which I have not doubt you're doing, they're either not aware of a risk inherent in the position and just got lucky they were never whacked by it or they're mistaking the cost of money as a risk free arb (I can buy an SPX box for less than parity right now, the delta reflects the interest between now and when it closes). I'm just going to say I don't believe it's possible that anyone ever successfully does a COB order for selling a stock X strike Y June call at $1.05 and buying the same stock X at strike Y July call for $1.00 which is what it would take to really have an arb on a calendar spread. You might be able to leg into that, you might be exposed to a dividend risk you weren't aware of, but that just doesn't happen in a risk free manner let alone happen regularly enough to make it a strategy. Would love to be proven wrong on that though.
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I think you'll like this:

https://www.elitetrader.com/et/threads/traders-that-beat-the-system.342406/page-5#post-5052290

Pretty sure he posted some other arbs as well (from memory, I believe they were calendar and flies at a credit)
 
Sig said:
First I think you're talking about two fundamentally different things. A worthless penny stock ......yada yada yada.
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Ok. So I'm not quite sure if you really don't understand it from an intellectual point of view or if you just want to split hairs here in order to start and win a pissing contest.

Just because YOU cannot do it, does not mean nobody can't. There is a horde of retail traders especially in eastern europe who do nothing but swoop in and take out truckloads more than risk free returns in microcaps.

I understand that you might have a little bit of an options background, but if so, how did you not make a shit ton of money when MM's said "fuck this, I'm outta here" during the financial crisis in 2008? The misspricings were ridiculous and yes you could swoop them with a COB order.

Perhaps you just trade the wrong markets, who knows. I could understand if you just grinding all day for a lousy return in the equity options market.

CME listed cheese futures recently and I'm going to trade them. I learn markets that nobody cares about and nobody wants to trade, trade all of them and enjoy my daily unicorns.


And by the way, nobody ever gives a flying fuck about "proving" something here on ET. It's food for thought. If it helps, so be it. If you don't like it, fine, don't like it.
 
MrMuppet said:
Ok. So I'm not quite sure if you really don't understand it from an intellectual point of view or if you just want to split hairs here in order to start and win a pissing contest.

Just because YOU cannot do it, does not mean nobody can't. There is a horde of retail traders especially in eastern europe who do nothing but swoop in and take out truckloads more than risk free returns in microcaps.

I understand that you might have a little bit of an options background, but if so, how did you not make a shit ton of money when MM's said "fuck this, I'm outta here" during the financial crisis in 2008? The misspricings were ridiculous and yes you could swoop them with a COB order.

Perhaps you just trade the wrong markets, who knows. I could understand if you just grinding all day for a lousy return in the equity options market.

CME listed cheese futures recently and I'm going to trade them. I learn markets that nobody cares about and nobody wants to trade, trade all of them and enjoy my daily unicorns.


And by the way, nobody ever gives a flying fuck about "proving" something here on ET. It's food for thought. If it helps, so be it. If you don't like it, fine, don't like it.
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I honestly don't even understand what "swoop in and take out truckloads more than risk free returns in microcaps." even means? How could you manufacture a risk free return of any kind in a microcap given that they don't have options that trade? If they're pumping and dumping, it's neither risk free nor legal and trying to catch that falling knife if you're not in on the pump is a fool's errand.

And I've found it's largely an illusion that the absence of a MM (which just leads to insanely wide spreads) or an every day insanely wide spread product like cheese futures is an opportunity. I get the sentiment that there must be some opportunity in ignored products where you might actually end up being the smartest guy in the trading pit. I've done some pretty extensive trading of products that don't trade on exchanges at all and are almost entirely brokered bilateral deals like coal and environmental commodities. And I've found that the spreads just eat up any advantage you get from the fact it's a little examined corner of the market that you know more than anyone about. I'm just trying to share that experience in hopes that others don't have to reinvent the wheel.

I couldn't care less about a pissing contest or proving anything, I've had enough success in life I don't require the validation of others in general but certainly not anonymous posters on ET. I do appreciate learning from others here and hope to make that as even an exchange as I can. It's possible to disagree and not be disagreeable, I certainly hope I haven't personally attacked you or done anything other than discuss the topic at hand? Asking you to demonstrate something that's pretty far fetched isn't something to get spun up about. If I told you I'd invented a perpetual motion machine or a unicorn that pooped out gold dust I'd rightly expect you to ask for some proof as well.
 
Sig said:
Asking you to demonstrate something that's pretty far fetched isn't something to get spun up about. If I told you I'd invented a perpetual motion machine or a unicorn that pooped out gold dust I'd rightly expect you to ask for some proof as well.
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No. If you told me you did, I would try to build one for myself.
What would be in for you to proof your work? Right, nothing but a bunch of copy cats.

@jtrader33 showed you that it is not impossible to arb as a retailer. Oanda has been gamed a long time ago by an ET user, too. EUR/USD forwards are still quoted by hand, exotic currency NDF's still bleed edge.
So you know it's possible, you just have to be good.

Take it or leave it.
 
MrMuppet said:
No. If you told me you did, I would try to build one for myself.
What would be in for you to proof your work? Right, nothing but a bunch of copy cats.

@jtrader33 showed you that it is not impossible to arb as a retailer. Oanda has been gamed a long time ago by an ET user, too. EUR/USD forwards are still quoted by hand, exotic currency NDF's still bleed edge.
So you know it's possible, you just have to be good.

Take it or leave it.
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Still confused by what "swoop in and take out truckloads more than risk free returns in microcaps." even means and absolutely stand by the assertion that the fact that something has no MMs, is a niche, or is hand quoted means anything but insanely wide spreads. Let us know how the cheese thing goes and what your experience is the first time you enter a hand quoted forward.

On the other hand, I've actually said here on ET on several occasions that the forex "brokers" who don't provide direct access to the market are ripe for gaming because they game so much themselves. I've actually participated in that myself, although I'd maintain that besides Oanda, who are honest, the realized risk I saw in getting my deposit and winnings back from the bucket shops bumped my risk adjusted return back to a level that was too low to make it worth while. You could probably put together a combination of a bunch of them with a bunch of small accounts to the point you could eek out $50K a year or something but not worth the effort IMHO, especially for me as an American with all the VPNs and overseas accounts, FBARs that would start to look suspicious, and the rest that would be required.

If you can make a zero drawdown living over the long term exploiting risk free arbs then good on you. I'm happy to admit that I'm not as "good" as you if that's truly the case.
 
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