Institutional Options Trades

D

deltahedge

Hey Everyone,

So I was looking at the volume of exchange traded option contracts across large cap underlyings (i.e. XOM, AAPL, GOOG) and I kept thinking to myself WTF how does even a small hedge fund with $100 AUM even do a simple vertical spread on a month to month basis) given the lack of liquidity and open interest? I'm beginning to think that even running a $10M fund just to do condors on an index would be fairly difficult given the lack of liquidity.

So my question is do all institutions and even hedge funds just outright purchase or sell options as a hedging instrument or for pure leverage instead of doing what us advanced retailers do of employing spread trading strategies (i.e. verticals, calendars, butterflies, condors, etc)? Or do some of these funds engage in such trading setups, but execute the majority of their transactions OTC?

Thanks :)
 
Quote from deltahedge:

Hey Everyone,

So I was looking at the volume of exchange traded option contracts across large cap underlyings (i.e. XOM, AAPL, GOOG) and I kept thinking to myself WTF how does even a small hedge fund with $100 AUM even do a simple vertical spread on a month to month basis) given the lack of liquidity and open interest? I'm beginning to think that even running a $10M fund just to do condors on an index would be fairly difficult given the lack of liquidity.

So my question is do all institutions and even hedge funds just outright purchase or sell options as a hedging instrument or for pure leverage instead of doing what us advanced retailers do of employing spread trading strategies (i.e. verticals, calendars, butterflies, condors, etc)? Or do some of these funds engage in such trading setups, but execute the majority of their transactions OTC?

Thanks :)
More...

Are you kidding me? The over the counter option market is huge! You could do 10k spreads on any large cap stock with one phone call. Do a Google search for institutional option sales traders and you'll get a huge list.
 
Quote from deltahedge:

Hey Everyone,

So I was looking at the volume of exchange traded option contracts across large cap underlyings (i.e. XOM, AAPL, GOOG) and I kept thinking to myself WTF how does even a small hedge fund with $100 AUM even do a simple vertical spread on a month to month basis) given the lack of liquidity and open interest? I'm beginning to think that even running a $10M fund just to do condors on an index would be fairly difficult given the lack of liquidity.

So my question is do all institutions and even hedge funds just outright purchase or sell options as a hedging instrument or for pure leverage instead of doing what us advanced retailers do of employing spread trading strategies (i.e. verticals, calendars, butterflies, condors, etc)? Or do some of these funds engage in such trading setups, but execute the majority of their transactions OTC?

Thanks :)
More...

Our clients use electronic platforms to execute orders across multiple exchanges. They also have electronic access to the complex order books for spreads. In addition, for finding liquidity on large orders, we have floor brokers on the CBOE and off floor that are paid to go out and find liquidity. I don't see it as a problem like it was before electronic multiple listed markets.

Give me a call if you have any questions.

Bob
 
Yeah, you don't need to work anything listed or even FLEX. I've known guys who have done large OTC deals as individuals. BSC used to do a lot of collars in the telecom and tech stocks for execs.

Most of the large risk-arb shops deal mainly in equity swap deals as they would be encumbered with RegT if trading listed.

Barakett (HF) used to trade 100k listed option contracts per month.
 
it's not uncommon for options to trade in 20-40,000 lot blocks.. that's 20MM to 40MM share equivalents.

It's a big market. And in index, it's even crazier.

Then you get to the OTC market and it's another story alltogether. Notionals there can easily be in the billions of dollars.

Surpized to see this question by a guy called deltahedger.
 
Quote from atticus:

Yeah, you don't need to work anything listed or even FLEX. I've known guys who have done large OTC deals as individuals. BSC used to do a lot of collars in the telecom and tech stocks for execs.

Most of the large risk-arb shops deal mainly in equity swap deals as they would be encumbered with RegT if trading listed.

Barakett (HF) used to trade 100k listed option contracts per month.
More...
I have a question about this, re: OTC deals for individuals. I'm told by several OTC brokers I've spoken to that there's a regulatory requirement, that I need $10mm in AUM before I can trade OTC and clear at CME/ICE (via clearport, etc).

Is that not the case in the equity world?
 
OTC in the equity world with decent margin requires 50-100MM. WIth crap margin, you can get away with 2MM-10MM (fully collateralized, etc).. But your pricing will not be good and the suite of products you can trade are very limited. You are better off sticking with listed.

I've looked into it in the equity world. The best way I think is to use a private bank.

If you want institutional coverage you will need a lot more money and even 50MM won't get you great terms.
 
Quote from heech:

I have a question about this, re: OTC deals for individuals. I'm told by several OTC brokers I've spoken to that there's a regulatory requirement, that I need $10mm in AUM before I can trade OTC and clear at CME/ICE (via clearport, etc).

Is that not the case in the equity world?
More...

Depending on your status. In this case my brother is a telecom exec who had to hedge OTC as exchange options had yet to be listed. The reg requirement in your case was a Clearport matter.
 
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