5:45 – early rise, whichever desk you end up on you are most likely going to be waking up around this time. Adjust your sleeping habits accordingly or suffer for most of the day.
6:30 – Arrive on the desk, market opens in 90 minutes so its really a countdown from here. 20 minutes is spent just turning on all the systems, with 4 computers and basically each running 10-15 different applications this is quite time consuming. Its inevitable, but you will every morning forget to log in into one crucial system and realize at the worst absolute moment.
6:50 – Start reading various new sources, generally FT, Bloomberg, City AM, and then the internal research that comes out. Finish off with a couple broker chats.
7:15 – look at the largest positions on the book and try to come up with a rough game plan for the day. I generally like to make a list of risks I don’t like, in order of priority, and then work down the list throughout the day. You want to make sure you know the biggest risks in every category (ie gamma, vega, delta, decay, skew, div).
7:30 – Morning meeting with sales and research, generally a hard time if you have had a rough night
7:50 – Just do a last glance over the stock news to make sure nothing has been missed before the open. Last thing you want is to be surprised by a big move on the open. One good thing to keep in mind is that you never want your boss to ask you a question and you cant answer. If you are running risk, you need to be aware of everything at all times.
8:00 – Market opens, watch any big movers on the day, cash equity prices find their levels fairly quickly, vol levels adjust a bit slower, generally within the first 10 minutes you get an idea of where vol is on most names.
8:15 – First wave of client requests comes in. I cover several of sectors so you can get a backlog of 7-10 prices pretty quickly. Prioritize them by clients and size. It is crucial that even when you only have a couple minutes for each price you make sure you have all your bases covered. With options because you have so many different risks, you need to make sure you are not being picked off on vol (so check if anything similar is in the broker market already trading, this is also a venue to hedge out risk and allows you to skew your price accordingly), make sure you aren’t being picked off on divs and make sure that you can find borrow on the stock if you are selling shares as part of the trade. With the rules on short selling in Europe this has become more of an issue recently.
8:30 – Finally send off last of the prices, and get some time to look at how the book is doing, start phoning up brokers and start working some trades. Options on single stocks in European trade a bit differently than in the US, the liquidity is not the same. The issue is that screen prices are kept very tight in extremely small size, and clients expect the same spreads in size that is 50x larger. Problem is that unless you can find someone to find the other side in the broker market, you will get wider prices with brokers than you give to clients.
This means to survive you need to be constantly aware of what brokers are working so that you can spot chances to offload risk. So when a client request comes in you can skew it appropriately. The best case scenario is when you know someone is a buyer in the broker market, buy it from a client at a vol from mids, and then offload it in the broker market at a vol above. However, this is very rare, so most of the time you need to make a price based on a prop view if you will. You need to price it according to your view of the trade, instead of where you can offload it
9:15 – On a typical day, this is around the time when things calm down, generally chat with co workers or use the time for a bathroom break. Always go when you have a chance and not when you need to, nothing unfocuses the mind more than having to go to the bathroom, and sometimes you just cant go for 30 minute stretches.
10:00 – Still fairly quiet, finally get to fire up Excel and work on some longer term projects. It gets difficult on a flow book because you need to find the balance between looking after the risk, but at the same time explore opportunities to move the business forward.
10:15 – spoke too soon, big client request comes in, good client so the price needs to be very competitive. Basically a double edged sword, you can take a lot of PNL upfront on the trade, but you know that getting out of the position is impossible and will take a couple weeks. Price it with the help of the senior guys on the desk and get back to excel.
12:00 – company announces a profit warning, unfortunately you have a short gamma position and the stock is down 5%. This is one of the situations you hate to be in. The stock is down 5% and because of the short gamma you are long a lot of delta. Now do you sell the shares 5% down or hold on and hope it rallies back. As a personal rule I like to keep my delta’s from my short gamma’s to a certain limit, and I hedge so that it never crosses that limit. You do not want to be stuck with a stock that drops 20% in a day and you just sit there watching it.
This is also important that you know everything about your short gamma’s, more so than your long’s, because if something gaps down you need to know what your pnl and delta is. With longs its fine because its positive pnl, but negative pnl always brings more senior attention. You also need to make sure you know not just your local risk, but your risk as spot moves. Because in a client flow book you have thousands of positions, your risk can quite easily flip as parameters move. That is why you need to look at your risk in three dimensions, time and spot. Its what makes derivatives more interesting than delta one products, but it also takes a bit more effort in terms of risk management.
12:30 – stock has calmed down so get back to excel, keep an eye on the chart in the corner of the screen though if it has any follow up move.
13:30 – Attend an IT meeting for 30 minutes, just really listen to updates on various projects that are being worked on.
14:00 – Get back the desk to find 10 prices waiting for me. Lock back into the cockpit. Pricing becomes fairly routine after a while.
15:00 – Have a Big Short gamma expiry today that is OTC and has just rallied close to the strike. Pin risk is very real. The stock is trading just above the strike and I am fully hedged, which means that if it dips below the delta flips from 0 to 1 (or 1 to 0 but it has the same effect), so all of a sudden you get very long delta if it’s a sizeable position. Now a long delta position isn’t a problem if the stock stays near that strike, but it could then drop 3% and you can lose quite a bit. However, if you sell shares and it comes back up through the strike you get short a lot of delta. This situation gets even worse if the stock is illiquid and you get long/short several times the daily volume, at these times your options are very limited, and you need to be aware of the strike risk days/weeks leading up to the expiry so you can plan accordingly.
16:00 – Slowly start hedging the smaller delta positions on the book so the last 15 minutes can be spent focusing on the 10-15 large positions and expiries. This is one of the most hectic times of the day, as a lot of stocks you need to hedge quite a large percentage of daily volume. In addition to this several prices come in for clients, and you are trying to finish off some stuff you have been working in the broker market. Therefore on a standard day there are 20-30 things you need to be on top of, and so mentally it does stretch you a bit. Another tricky thing is that different markets close at different times of the day.
16:35 – markets close, finish off all outstanding bookings before running the final pnl for the day. Now technically your day is done once you submit pnl, but you don’t leave before 6 and use the time to work a bit on projects. It’s the only time of the day where you don’t need to monitor something so is actually the most productive as well.
18:45 – wrap things up and head home
mod note: this was originally posted on http://www.salesandtradingcareers.com/#/day-in-the-life/4572216561
wat
Fantastic. We need more detailed things like these.
awesome SB
My brain hurts. Credit to OP!
always enjoy these write ups
haha that's what i said when i was posting it
Why can't machines take over this? What you do sounds very manageable by programs. Traders and brokers have to go, it hurts the bottom line.
Machines are doing a lot of this in a lot of prop shops, maybe not so much on the sellside.
all the good money in options is in retail flow, its why getco bought knight.
Nice post SB quick question you mention that The stock is down 5% and because of the short gamma you are long a lot of delta - you can also be short gamma and negative gamma though too right? i.e. short a call
I take it you meant to write "short delta and negative gamma" in your post.
Yes you can, but an options book is in general a vol trading book (you can run delta spreads and outright delta positions etc but lets not focus on that). In the simplest form you delta hedge the positions on the book on the close (this also varies hugely on your view), therefore you come in the day delta neutral by buying/selling stock. You are correct, if you are short a call you have a negative delta and negative gamma, but ifyou have bought stock against that call you can be flat delta and short gamma, and at this point if the stock moves you in essence "build" a delta position. If the stock moves down you get long delta on your position (stock and option) and as the stock moves up you get short delta.
There is a reason most option books run like vol books, and hedge out the delta. This is because your vol risk is of a lower magnitude than your delta risk. Lets say you have 1Yr ATM options in 10 mln eur notional (notional = options qt * spot price), this is approx. 34k of vega. So for each 1 vol point move in imp vol you make/lose 34k euros. Lets also say the delta is 50d, so the delta on the position is 5 mln eur. This means that for a 1% move in the stock you make or lose 50,000 eur. If a stock is on a 30 imp vol, then you expect the stock to move just shy of 2% per day, therefore your pnl on the delta will be +/- 100k eur per day, and can be much much larger. A 30% implied vol stock will tend to have a 5% move every couple of days, which is 250k eur pnl. The imp vol needs to move 7 vol points to match that, which happens in only extreme cases. Therefore you can see by hedging out the delta and trading the vol you cna lower the magnitude of your risk (as youd expect given that you hedged something), what is the importance of this? Well think about what type of clients you want to trade with. Lets say a big institution wants to use options as a directional delta play, and wants to put on 10 mln eur notional as beofre and have a 5 mln eur delta position, you put the trade on and hedge it and take ona position of 34k vega. Now lets say you look at this stock and it hovers between 28 and 35 vol, and the current bid/offer is 29.5-30.5 and you buy the options at a 29.5 vol, so you take half a vol of bid/offer spread which is 17k eur. You made 17k eur. Now you made 0.5 vols on an asset that has a 7 vol wide range historically over the past couple of months, and something where the vol moves less than 1 vol per day on a normal day, therefore you have quite a big margin of error on the trade. Now the insitution just "paid" 17k euros to put on 5 mln eur of delta that can have a pnl of +/- 250k eur a day. Therefore you got paid good money for the risk you are taking, and the insitution didnt pay tht much for the risk they are taking because they are taking on more risk on the same trade.
Sorry this post went a little bit off course but it helps explain market making at a bank a bit more.
amazing response very informative this site needs more posts like this to get its mojo back
My brain just exploded after reading this...
Great post! Would love to see a "day in the life" of an IDB.
-Be at the desk at 7:30 -Wait for trades -Yell/tell clients -Go home
There you go.
IBD? If so, compared to this it's child's play. Get in between 8-10am depending on your bank, and then it's a mix of building models, pitch books, confidential memorandums, management presentations, uploading docs to a data room, sitting on calls with attorneys during documentation/DD. Leave anywhere between 10pm-2am depending on your bank and how senior you are.
First 6 months are crazy in terms of how much you learn, then it plateaus out very quickly to the point where you're doing everything automatically after about 12 months.
If you want a break out by time of day, here's a good one: http://www.vault.com/industries-professions/a-day-in-the-life/a-day-in-…
Edit: Unless you're referring to an inter-dealer broker, in which case I have no idea!
lol. I meant inter-dealber broker.
So basically traders execute large positions on behalf or UHNW clients that have such large demands the securities can't be purchased without affecting the price.. and the trader is skilled in that he knows how to negotiate that trade?
I always thought traders were generating their own ideas and trading bank funds but I guess that's more an ER and proptrading/HF role (respectively)?
From what I've seen, both types of traders do both types of work. It's just that the sell side trader leans more toward client market making whereas the buy side trader focuses more on alpha generation. That's not to say that the opposite can't be true though. In the end, market takers and market makers both put on risk and have to manage it. It's just a matter of whether you directly initiated the position or if it was initiated upon you.
Enjoyed reading it - it says you are "retired" in your profile. If you get 1/8 of the excitement now a days, I would be very impressed... I've been working in a similar role but on the sales trading side, all I have to say is that this post is excellent and highlights a lot of risks traders are facing (although not in the same day usually as OP wrote); otherwise, I don't know how long you will stay away from a heart attack. Market today is much quieter in most European markets then it was pre-Lehman, but it's going to come back!
I could see a day like that happening during one of the big expiry. Although for the jun one, all pins were significantly higher to were we were trading
Some idiot mentioned in a reply that this type of trading can be automated; make sure to mention that in your interview to show what a true visionary you are. I won't go into why trading flow cannot be automated - but the jist is: machines don't have market info. Machines can't make a price to an instit that has a delta equal to the average daily traded volume + plenty of other reasons. Amen
Maybe not now, but give it another decade and we'll see what happens. I think one of the biggest obstacles in the industry stopping algorithms from doing more is the fact that a lot of people would lose their jobs if machines could replace them for a lot less money...
Tbh its realy a huge blend of everything. You cant draw a line between where client faciliation ends and prop trading begins. Especially in an options book, if you get a large position from a client, which will be a huge multiple of the screen size (think 50-400x) you then have to make a decision: do you like the delta? do you like the vol? what does it do to your current position in that name/sector/overall book? what kind of div risk does it put on your book? what do you think divs will do? You can basically turn a single simple option position into asking yourself 100 different questions on how to manage it. You usually dont unless its quite big, in general smaller positions simply get absorbed into the book and you see them when you run risk slides/pnl slides etc. But being a sellside trader is a 2 part job, the client pricing, and then risk management, which you cna think of prop idea generation but in a more reactive sense.
Ha def not retired, probably accidentally put that when making my profile originally. That post is one of a busy day (although I have had busier ha), cuz yea lately it has been VERY quiet. But you need to go in every day knowing it can get hectic and you need to be prepared for that. I remember when i was a junior and had to manage a big book for the first time over a quarterly expiry, probably one of the most stressfull day of my life to date haha.
But as someone above mentioned, like anything you get comfortable, you get desensitized to the stress/pace/pressure and you see it as normal, and trading isnt exempt from the list of things that can become a bit routine after a while, so you have to enjoy that routine.
Even though i was a cash US treasury trader..this reminded me of exactly what it was like being a market maker.
How much you make?
awesome post
not similar to my experience at a chicago options prop. way less BS here. IT meetings while the market is open?GTFO.
There are times when the market is quiet, not really what I would call BS, you are constantly trying to move the desk forward and IT development is a huge part of that, and the more traders are involved the better. Also most desks all have designated backups so the book is never unsupervised.
I LOVE THIS! I want a life like this! Thanks for this post!
what are the 40-60 applications really?
wow, thanks for this! just wondering, have you worked at the same firm for a long time, or is this a more recent position? you go to a target university?
Haha love the part about "not having that crucial application up". Wish I could tell you how many times that happened to me. I'm on the index side, but this is very much the same. Pricing is a bit simpler because everyone trades only a few names, but generally the size can get quite massive. Very good portrayal of a day in the life on the sell side though.
I think this is really helpful as an industry insider, but to be frank, I work in finance, albeit not on the trading side, and none of this made any sense to me. I can only imagine what all the wannabe bankers/traders/summer interns who are still students must have thought about reading this. Not trying to be critical or bashful at all, but perhaps like many others, I was expecting something a version that was a lot more dumbed down to understand generally. But maybe there's no other way to express what you do in another way. Thanks for the write up
How much money can you make as a derivatives trader ?
Summary of an Options Trader? (Originally Posted: 07/24/2012)
I'm preparing for a interview in which I present various careers in the finance industry and such. I was hoping that WSO could help me aggregate some of the information here.
I have to present an ‘Options Trader’ employed at a ‘Hedge Fund’. I understand what option traders do, but there are a few more details that I'm unsure of.
a) Typical Academic experience, technical expertise and qualifications;
b) Typical Career Path, Aspirations and Earning Potential;
c) How this function contributes and delivers value to the employer.
I will also be looking online for more information, but any responses (including helpful websites) will be appreciated! Thanks in advance!
(Others that I need to present include: ‘Market Risk Analyst’ employed at an ‘Investment Bank’ & ‘Product Engineer’ employed at an ‘eCommerce tech start-up’)
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