IV Smile and Firm Fundamentals

There is no such thing as a "retail trader" any more..
No question deep pockets helps..
The playing field has been leveled...
Market makers have the edge assuming order flow,but only if its 2 way flow..
If its one way flow,they better be good at "front running" a lost art:)

Forget the info advantage..Thats not their edge
 
taowave said:
There is no such thing as a "retail trader" any more..
No question deep pockets helps..
The playing field has been leveled...
Market makers have the edge assuming order flow,but only if its 2 way flow..
If its one way flow,they better be good at "front running" a lost art:)

Forget the info advantage..Thats not their edge
More...

I agree that there is no informational advantage to be had by anyone who isn't an institution, and the playing field has mostly been leveled when comparing the top non-institutional players and institutional players. There isn't much proprietary information left.

Where do you think the cremé for market markers is derived? It's control over inflating the width of bid-ask spreads, based on an evaluation of a product made by an algorithm designed by someone smarter than most of us. Buying order flow is only used to magnify volume and make a wide spread more profitable, as I understand.

So you're right, the information used to compile the evaluation is mostly available to all of us, but I'm guessing it's tough to actually do ourselves what they do with it. They also might have data from exchanges about user behavior and who wins and who loses and why, something we don't have access to. But yeah, regardless, they make money with spreads, not directly by having more processed information.
 
ironchef said:
@.sigma, I am thinking out loud here.

Aren't they simply stating the obvious: The market is efficient, all the prices, be it underlying or their derivatives include all the information available and are priced accordingly? As a trader all I care is how do I trade this? If they are correct, the only way I can trade and make money is when new information comes out and affect the "fundamentals". I only know two ways, I am lucky or I have inside information. They are telling me I was extremely lucky to come out ahead so far.

Not very reassuring for a retail trader with no way to get inside information.

By the way I didn't download the paper because I didn't want to register.
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A few things:

First, register. SSN is an immensely helpful source for knowledge, especially academic papers on øptionality.

Second, I suggest you read it before commenting.

They suggest that the way the implied smile is shaped on an equity underlying can be analyzed using fudamental metrics. So using fundamental analysis can help an option trader understand the cross section shapes of the IV curve. They conducted null hypothesis to disprove this and both nulls were rejected (confirming that fundies do in fact affect the iv smile).

Basically they used widely known popular fundamental metrics: Leverage, interest coverage, liquidity, profitability, investment, size, equity market momentum, dividends, and book to market ratio.

The implied vol level, slope, and curvature of the 30 day ATM options were analyzed in conjunction.

I'm still digesting this paper so I'll reply later with some more info.
 
lightfightercap said:
I agree that there is no informational advantage to be had by anyone who isn't an institution, and the playing field has mostly been leveled when comparing the top non-institutional players and institutional players. There isn't much proprietary information left.

Where do you think the cremé for market markers is derived? It's control over inflating the width of bid-ask spreads, based on an evaluation of a product made by an algorithm designed by someone smarter than most of us. Buying order flow is only used to magnify volume and make a wide spread more profitable, as I understand.

So you're right, the information used to compile the evaluation is mostly available to all of us, but I'm guessing it's tough to actually do ourselves what they do with it. They also might have data from exchanges about user behavior and who wins and who loses and why, something we don't have access to. But yeah, regardless, they make money with spreads, not directly by having more processed information.
More...
Question then: Since most of us seldom buy on ask and sell on bid, we normally traded mid or a few cents +/-, how much can they make from a wide bid/ask? I traded names with wide bid/ask.
 
lightfightercap said:
I agree that there is no informational advantage to be had by anyone who isn't an institution, and the playing field has mostly been leveled when comparing the top non-institutional players and institutional players. There isn't much proprietary information left.

Where do you think the cremé for market markers is derived? It's control over inflating the width of bid-ask spreads, based on an evaluation of a product made by an algorithm designed by someone smarter than most of us. Buying order flow is only used to magnify volume and make a wide spread more profitable, as I understand.
More...

well as we all know ever since the late 80s, early 90s the market has been accelerating as an organism. What’s that law? Moore I think? Power laws are at work here my friends.

a huge problem money markets had to deal with was the efficiency of liquidity in the past. Since the markets are ever evolving this problem has finished and keeps on, look at the volume numbers, also even better look at the bid/ask. Also peep the regulators and how they are approaching the NBBO. Study up on Rule 612 and how they’ve changed the minimum price value (mpv). Market makers have been arb’ed themselves, so now they manage their books differently. They profit from other methods as well in addition to the b/a spread.
 
ironchef said:
Question then: Since most of us seldom buy on ask and sell on bid, we normally traded mid or a few cents +/-, how much can they make from a wide bid/ask? I traded names with wide bid/ask.
More...

how much? It depends on how their book is structured, but I would think theoretically a lot of greenbacks from wider bid asks
 
ironchef said:
Question then: Since most of us seldom buy on ask and sell on bid, we normally traded mid or a few cents +/-, how much can they make from a wide bid/ask? I traded names with wide bid/ask.
More...

hey this is elite trader so let’s be elite, shall we?
511DA85E-E6D8-4E1D-9E96-C5754D2B1D6A.jpeg
 
Conceptually, this chart is joined by a second one, but it illustrates how market makers delta hedge, and position combo trades, and profit regardless of directional risk
 
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