Market Making & Options

Hi guys,

I am trying to figure out market making. I am trying to find the risks that market makers face, what they can do to protect them, and also how to use options to protect them and make profits. Can someone please shed some light on this? Many thanks

 
Best Response

Assuming you're talking about a linear mkt making desk, they are rarely going to use options in the course of market making... though they may use them to protect positions they are running, particularly over events, or to give them leverage they wouldn't otherwise be able to have.

Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard. -30 Rock
 

All the major bulge brackets that I can think of. Then the hedge funds / prop shops... Jane Street, GETCO, SIG, CTC, DRW, etc, etc, etc I know I'm forgetting some. I saw a really good description of how each player kind of fits into the grand scheme of things but I can't find it. Basically to my understanding the banks do the most size, but some of the prop shops and hedge funds fill in a niche gap that is advantageous for them in terms of size... there's obviously a few exceptions like Citadel but that is sort of my understanding. Take it with a huge grain of salt though.

 
Tupac:
All the major bulge brackets that I can think of. Then the hedge funds / prop shops... Jane Street, GETCO, SIG, CTC, DRW, etc, etc, etc I know I'm forgetting some. I saw a really good description of how each player kind of fits into the grand scheme of things but I can't find it. Basically to my understanding the banks do the most size, but some of the prop shops and hedge funds fill in a niche gap that is advantageous for them in terms of size... there's obviously a few exceptions like Citadel but that is sort of my understanding. Take it with a huge grain of salt though.
Yeah, that's what I am looking for, some sort of description of how each player fits into the big picture. That would indeed be very helpful.
 

Learning how to trade options offers a MUCH more valuable skill set than simply trading futures in my opinion. Options mm also tends to expose you to the futures market as a hedging instrument. Futures mm is usually based off a proprietary model that either analyzes flow/volume or makes a prediction on future price direction. To me, beyond prop models futures mm is blind luck. The spreads in futures markets are tight and volatility can be too high to capitalize on it depending on commodity. Bid/Asks are usually wider in options markets, leading to fatter profits if you can properly manage all the holding risks before you can offload the trade on the other side.

 

Thanks for the input. Clearly there are proponents of futures trading as well- can anyone else share some insight?

Great topic for those that are getting into trading and not sure the products they want to go after...

 

Market Making in futures is going to be a lot more speculative in nature than options because the spreads are tighter. You can hedge or arb between the different months and trade the curve also. In general tho its much more speculative in nature. I would love to Make Markets in equity index futures tho they tend to be extremely driven by computer programs now.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 

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