If I buy 1K calls on ZYX stock, how do MMs hedge their pos?

[murray t turtle]

Quote from flyers&divers:

an addition to the above post:

A lot of the MM's are not independent solo operators but trade for a firm, they may make markets on several names and their trades are fed in their mother computer. There are people upstairs monitoring the combined position to make sure that the firm's exposure is not too lopsided.

If the MM by any chance could or did not hedge their side of the trade after filling your order the upstairs people may hedge it in the process of costantly working on the global hedge.

Also think of the MM as a person keeping 7 plates swirling up in the air. While the are definitely working to have an edge and make money they are too busy for intricate games on each order.

When you are submitting an order on a slow option chain it does not mean that they are asleep at the other end because they probably handle many other names.

As far as buying on the bid and selling on the offer, even if you were personally standing there you could not do it unless you vere experienced and agressive so don't even dream about it from upstairs.

======================

In addition to the above post;
selling calls on the offer,[closing long position on offer] dont know much about that,
perhaps i dont give enough time like limit order buys.


As far as buying on bid on high liquid options, better chance of that occasionaly;
and different & even more so if underlying ''wiggles'' or pullbacks,and the buyer isnt in a hurry to cancel.

 

[Pabst]

Quote from murray t turtle:

======================

In addition to the above post;
selling calls on the offer,[closing long position on offer] dont know much about that,
perhaps i dont give enough time like limit order buys.


As far as buying on bid on high liquid options, better chance of that occasionaly;
and different & even more so if underlying ''wiggles'' or pullbacks,and the buyer isnt in a hurry to cancel.

I couldn't have said it better Murray.

 

[gkishot]

I am still confused. If I buy 1 call contract what position does MM have as a result? That would be my positition & not theirs. Can somebody explain it to me?

 

[MTE]

Quote from gkishot:

I am still confused. If I buy 1 call contract what position does MM have as a result? That would be my positition & not theirs. Can somebody explain it to me?

If you buy a call option and MM takes the other side then he/she will sell a call option. So you will have a long call and MM will have a short call.

 

[nitro]

Quote from MTE:

If you buy a call option and MM takes the other side then he/she will sell a call option. So you will have a long call and MM will have a short call.

Not likely.

nitro

 

[MTE]

Quote from nitro:

Not likely.

nitro

Yes, I know that the overall MM's position is unlikely to stay just at short call, but I was talking in isolation, considering just that transaction.

Otherwise, it is hard to say what will the MM's position be. 1 contract will be just "a drop in the ocean" so he/she won't even bother to do anything, but, generally speaking, the MM will hedge it in some way - i.e. long stock, spread or other....

 

[gkishot]

I am still confused. MMs make money on differences between ask & bid prices. Meaning that if I am bying from MM at ask & he has to turn it over fast & sell it to someone at bid. The difference goes into his pockets. The key here is fast otherwise he is exposed to market price movements. The only way it can work if he has a lot of clients & he processes big trade volumes a day. Why would he want to hedge his positions by bying stock & paying comissions which would effectively decrease his bottom line? Hedging is a rather long term strategy. What I am missing here?

 

[sle]

Quote from gkishot:
What I am missing here?

What you are missing is the fact that each specific option is not liquid. For example, if you are buying a 90 call on XYZ, it is not very plausible that there will be a seller of the very same option coming up in the near future. However, a market maker knows his risks in the form of greeks and can come up with a method to hedge this exposure via other options and the underlying. The way to think about it is that option contracts themselfs are not very liquid, however, greeks are liquid and trade frequently. Does that make sense?

 

[flyers&divers]

This thread is interesting because the conversation shows how intricate and risky the marketmaker's job is.

 

[Optionpro007]

Guys, I really appreciate the information you have shared.

So in conclusion, after filling my position the MM will open their hedge to treat their sell to me as an independent issue. (me 1 pos / MM 2 or more pos)

Some of you have suggested that the MM will not do anything against me (trying to squeeze me out of the position), specially
if it's a big size ?

I had always thought MMs are not just your friendly MMs, there only to provide a service, but had an inherent interest in taking your money.....manipulating the b/a or the underlying, specially in the case of low volume stocks.

I must have been wrong then, if the MM are not doing the manipulation, then who is ? I know it happens.

Thank you very much for any comments.