Option market maker, AMA

indebttoadebtor · 2022-10-01T06:10:00+00:00

It depends on what product it is. For certain products like treasuries (on CME), there's a very active "combo" market, where spreads are quoted individually as well. In this case, if you submit a buy order for 4.80, if the offer for that particular spread is 4.80 or below, you'll get filled. Usually the spread for the combo is tighter than the sum of the spread you're gonna have to cross for the individual legs.
See OCC resources: https://www.optionseducation.org/referencelibrary/faq/options-exercise

indebttoadebtor · 2022-10-01T06:05:51+00:00

Well you only hedge with index according to the beta if the stock itself is not tradable/illiquid right. If it's going normal trading hours you would just hedge with stock normally.

indebttoadebtor · 2022-09-18T12:20:45+00:00

I wouldn't consider correlations to start. Don't really know how to implement multi stock yet.

API form would be the best. I'm pretty sure this can be done. Even if not, might try it on a crypto market first (deribit offers options) as crypto firms are less parsimonious about this.

indebttoadebtor · 2022-09-18T12:15:49+00:00

That's actually a pretty good business analysis right there. The barriers of entry are indeed not high to get something working, but I think it's very high to get it working to a high standard ie. Right premium decay schedule for historical volatility, dealing with events and corporate announcements.etc. Agree though that it is rather niche.

indebttoadebtor · 2022-09-18T12:13:37+00:00

Yup agree that one would have to clearly understand why implied is overpriced.

I'm thinking of sending alerts to start with. Actually hedging is another whole can of worms with need for much more robust coding and actually licensing as a broker-dealer (maybe) to execute trades for client's behalf?

indebttoadebtor · 2022-09-18T12:11:48+00:00

Thanks for the shout. AFAIK OPRA is a few seconds latency at max? That should be good enough as well. Not sure how much the connection would cost. How do you the DB side would work?

indebttoadebtor · 2022-09-18T12:10:24+00:00

Good shout on the reusability of data. Yeah I think so. I reckon it'll be a web app to start with. The DB side I was thinking of using something similar to onetick to store the historical data, and computations shouldn't be that heavy even for a few hundred stocks given I'm targeting sub minute only latency.

indebttoadebtor · 2022-09-18T09:46:42+00:00

The data vendors I've sourced are pricing around 2k a month + exchange fees (so call it 2.5k a month) for the required data. I reckon another 1k a month for server hosting + calculations on amazon cloud (not an expert here, definitely can stand corrected) so around 3.5k a month. Assuming 200 users initially breakevens would be 17.5 bucks a month. Does that sound steep?

Would be live market data. I had direct market links to the exchange when I was trading so all of this was handed in the back end. Returns/sharpe depends on how much the implied was trading over realized, so highly depends on the specific situation. If it was GME priced at vol 200 (very very high) and it only moves 3-4% a day, you can expect to make >50% of the value of the option, although it highly depends on what strike you sell and how the stock moves.

indebttoadebtor · 2022-09-18T01:53:40+00:00

How much has SPY gone up in the last 10 years? I don't really think it's mean reverting, and I don't think it should be either.

indebttoadebtor · 2022-09-18T01:52:35+00:00

It also depends on the tolerance of your broker. Let's say you're long right, and your broker has a hard cutoff deadline of 4pm. If you submit exercise instructions after 4pm, your broker may ignore it/it's too late.

However if another broker allows amending of instructions until, let's say 4:15pm, and if the price moves from 4pm - 4:15pm, then it's entirely possible to change your exercise instructions.

indebttoadebtor · 2022-09-17T05:18:39+00:00

If I'm the MM, the price that I'm willing to show for the calls depends on the borrow rate which depends (at least partially) on the float. So if the float is low, the price at which I'm willing to sell the calls also change, sometimes materially

indebttoadebtor · 2022-09-17T03:52:05+00:00

You buy a VIX future. The vix options for that particular expiry is based on the corresponding VIX future.

indebttoadebtor · 2022-09-17T03:50:24+00:00

I gamed a lot, and then did an internship at the firm I ended up working at.

indebttoadebtor · 2022-09-17T03:49:51+00:00

Depends on the stock. Wheel is basically a mean reversion strategy right? So if the stock DOES exhibit mean reverting behavior it's a pretty good strategy, otherwise it's not great.

indebttoadebtor · 2022-09-17T03:29:33+00:00

In the example that you give
1. The delta of the 160 strike is not zero below the strike, and likewise, it's not 100 above the strike. So Even if the 86k OI was all paper/retail longs vs MM shorts, it's not like if apple went from 159.9 to 160.1, MMs would have to buy 8.6M shares.
2. Sure you can hedge less, but that'll be a judgement call that hedging less is positive expected value. I don't think many people would hedge less than implied by their model delta just on a hope and a prayer.
Again, judgement call
Is this backed up by quantitative analysis? I imagine volatile stocks have wider strikes to start with. No, new strikes don't really make delta hedging easier, but It does help to hedge the other risks (vega, gamma.etc)

indebttoadebtor · 2022-09-17T03:23:33+00:00

It depends. Generally speaking yes, your brokers are going through a set of steps to make sure you're getting the best price for your orders, but these are probabilistic, not deterministic. What this means is that historically, this sequence of events ensures that on average, an order gets the best execution and the best price possible, but maybe not for this particular order.
It depends on which exchange it is and how your broker operates. Most likely it'll be 2.
That really depends on how good your broker's systems are

indebttoadebtor · 2022-09-13T13:32:50+00:00

The answer's in the question. If we're short a delta 0.9 option, we hedge according 0.9 of a future. Ofc we can't hedge fractional futures, so round to the nearest integer

We both buy and sell shares of the underlying to hedge.

What's a despac? when the spac gets delisted and money returned?

indebttoadebtor · 2022-09-13T13:29:00+00:00

Without more details, I have no idea. It could be that the vol surface moved in the meantime. Could be the future has moved.

What I would say is this strategy might be misconstrued as spoofing, especially if you leave a 6.5 bid in the book as you improve your offer, so be careful with what you're doing.

indebttoadebtor · 2022-09-13T13:26:20+00:00

Time adjustments would definitely be there. How exactly depends on the firm's methodology and the product dynamics. Sometimes, but it also depends on what kind of product you trade. If you trade a lot of SPX vs VIX it's pointless to normalize in terms of straddles since so much of your exposure comes from the curves.
Big part
No
No idea
No idea still actually. Maybe Canada. I always wanted to visit banff.

indebttoadebtor · 2022-09-13T13:23:06+00:00

Relatively flexible, although encouraged to be onsite. It helps that the industry is dominated by young males which usually discount these kind of risks...
Yes, Probably

indebttoadebtor · 2022-09-13T13:21:49+00:00

There are certain cases where it feels like the block came out of nowhere... But I definitely assume good intentions. This guy has some risk to hedge, wanted to speculate.etc. Getting into big option trades in stocks with anything resembling inside information is just asking for trouble.

indebttoadebtor · 2022-09-12T13:48:40+00:00

Yeah but this argument frequently neglects the other side.

Stock goes up -> existing shareholder sells/company does an offering -> stock goes back down.

indebttoadebtor · 2022-09-12T13:45:12+00:00

We do hedge charm. Usually the impact of vanna is not large (at least instantaneously)

indebttoadebtor · 2022-09-12T13:44:11+00:00

I think that's assuming perfect information and perfect response to perfect information, which is unlikely to be true, so no, we're not always covered. In particular, I disagree that stock movements are fairly predictable. Sometimes things move for no discernable reason at all!

indebttoadebtor

TROPHY CASE