Ask a Sellside Options Trader

derivstrading's picture
Rank: Neanderthal | 2,541

So i have been on this forum for a while, and recently i have been bombarded with personal emails asking me questions about the industry, trading, breaking in, interviews etc, so i wanted to open the discussion as these types of thread seem to be very informative, and it will allow me to respond to a lot more people then goign through my inbox on the tube where i am bound to miss some.

My background: currently a flow options trader at a bulge bracket investment bank, got in from a complete non target. have done internships at various desks across FICC and equities, internship at a global macro hedge fund, and a private equity firm, so ive covered quite a wide spectrum,

So if you have any questions then let them fly.

Comments (39)

Jan 18, 2013

What kind of options do you trade?

"Look, you're my best friend, so don't take this the wrong way. In twenty years, if you're still livin' here, comin' over to my house to watch the Patriots games, still workin' construction, I'll fuckin' kill you. That's not a threat, that's a fact.

Jan 18, 2013

What kind of options do you trade?

"Look, you're my best friend, so don't take this the wrong way. In twenty years, if you're still livin' here, comin' over to my house to watch the Patriots games, still workin' construction, I'll fuckin' kill you. That's not a threat, that's a fact.

Jan 18, 2013

What kind of options do you trade?

"Look, you're my best friend, so don't take this the wrong way. In twenty years, if you're still livin' here, comin' over to my house to watch the Patriots games, still workin' construction, I'll fuckin' kill you. That's not a threat, that's a fact.

Jan 18, 2013
Will Hunting:

What kind of options do you trade?

Flow vanilla single stocks

Jan 18, 2013

What's your take on the future of the industry?

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Jan 18, 2013
Cramer:

What's your take on the future of the industry?

Its turning into something very different. Traders used to be incentivized to swing the bat, as you sort of had that option of if it pays off then you get paid and if it doesnt then you have limited downside. However, now its a bit flipped, if you swing the bat and it goes right you arent going to see the upside but if it goes wrong you will be out of a job and not be able to get back in. This flip in incentives does flow down to behaviour, and the new trader is a lot more risk concious.

This might take away that huge upside, but honestly I personally think its for the better, as the other way around is dangerous as it proved.

Trading is still a very lucrative career, but you cant be delusional coming in. You will be coming in to work some days and just see friends being laid off, its just how it works, and it does take a bit of a mental toll when you are coming into the building and think maybe you its your day.

In terms of regulation, it def feeds down to the desks, ie the european short selling rules, THe biggest problem is that there is just so much gray area and so little clarity. What can you actually do and not do. There dont seem to be well defined rules.

People on this site make it seem like the biggest threat to traders is being replaced by computers, but honestly the biggest threat on the sell side is just lack of client activity. When the big clients stop playing in the market the liquidity just dries up. Its sort of a vicious circle, clients dont want to trade, liqudity dries upo and spreads widen, then people want to trade even less because it gets too expensive to cross spreads.

THe thing is, as long as those lines on the screen keep moving up or down you can make money, just need to be a bit smarter when its just the smarter people in the market playing.

Jan 18, 2013

how much money do yo umake?

Jan 18, 2013

Great answer, thank you.

One more question though. It seems for IBD people always say you need a sophomore internship in finance, then an IBD internship junior year to be competitive for FT recruiting. Is it the same for S&T where you need trading internships or finance experience your sophomore and junior summers or are they more concerned about finding the smartest people/most interested in the markets and aren't as caught up with actual experience?

Jan 19, 2013
Cramer:

Great answer, thank you.

One more question though. It seems for IBD people always say you need a sophomore internship in finance, then an IBD internship junior year to be competitive for FT recruiting. Is it the same for S&T where you need trading internships or finance experience your sophomore and junior summers or are they more concerned about finding the smartest people/most interested in the markets and aren't as caught up with actual experience?

Yes in S&T there is less focused on this "path to greatness" than IBD, but at the same time if you get a stack of 100 CV#s and need to choose 10 to interview, you have no idea how similar all the CVs look. I know that in the mindset of a student aplying they think they are an individual, and that they are smart and have this amazing passion for the markets, but someone looking at this stack of CVs doesnt know you, all they know are the words on the CV they look at for 20 seconds. Therefore you might be smart and passionate but if you cant convey that on that one page it doesnt matter. Therefore I would say your experiences are vital. I was able to get through a lot of screening processes by having a private equity internship after my freshamn year. It was a tiny boutique, but it showed that i was interested in the field, that i was able to go out and get opportunities, and it was something that stood out a little bit.

So dont focus on any specific path you thinkyou need to follow, but just go out and find opportunities that you are interested in and your CV will become more interesting to read. For example a friend of mine did an internship at a sports betting company. Something like that stands out, and is quite interesting to a trader.

Slapshot101303:

So what are the differences between being an option trader at a BB vs one of the option market makers in Chicago (Wolverine, CTC, Optiver etc)

I have never worked for one of those firms so i can say how it is from my perspective. One of the largest differences is that BBs have clients and the MM's do not. BBs generally handle larger size due to the client side of things, where they have to take down a lot of risk and then manager. MMs are more concerned with trading on the screen and in the broker market, so as a BB trader I will often times trade vs MMs in the broker market. Really boils down to where you think your edge comes from. At a BB you can get into positions at a fairly good level from clients, at a MM you try to really find smaller inefficiencies and its a bit more like scalping from what i gather, but someone else who has worked here will have to chime in.

newbprosmonk:

1) I'm just curious, is it difficult market making single stocks near earnings releases or similar events? How do you go around that?
2) Practically speaking, what do you do on the desk? I'd imagine that computers would do a lot of the execution nowadays. Do you ever have to "manually" make markets, if that makes any sense.

What books/resources would you recommend for an intermediate options player that's practical (Never worked on any desk, just learned about vol. etc. etc. by doing and failing.)

1) Short answer yes. But with known events the vol sort of follows a predictable path, so vol squeezes into the announcement obviously, and then drops off after it comes off. But yes it is tricky because you cant give a ridiculously wide pricer (obv can be a bit wider) but lets say implied is 25 and realized is 18, do you buy that hoping the earnings move is big enough to offset the decay you pay on every non earnings day? or do you sell it and then potentially have a 10% move and you are short gamma?

2) Computers do not make any markets. Might be different in the US but in Europe on a BB desk market making is 100% manual, and i dont see that really changing. European screens for options have such small size and are sometimes so ridiculously tight because people put bids and offers in 5 lots, that any computer that auto prices will be getting picked off. For example a Dec13 second rate german name might be 20-20.4 vols wide on the screen in 5x5 lots, and you can easily see it in the broker market at 19 - 23 vol. Therefore you need humans to price.

3) In terms of books, the best book for a beginner is Intro to Options Trading by Frans de Weet. Hull is a bit pointless because it scratches the surface of a lot of topics, Natenberg is a bit better, but honestly the best exercise to learn how to trade options is to take some blank paper. Then for each of the following strategies: call, put, callspread, putspread, risky, strangle, butterfly, calendar spread, draw out what happens to your delta, gamma, theta, vega, rho,borrow risk, dividend risk as spot changes, as vol changes and as time to maturity changes.

qweretyq:

Why did you choose flow trading instead of prop shop?

Bit more of a straightforward process in terms of applying. I also dont think i could have passed the mental math tests Optiver has haha.

Also starting at a BB I think is a better move unless you are really confident you can make money at a prop shop. It exposes you to a lot more things, a lot more people, you get a much better sense of how the business works. You can network with people across the floor which is so important. You might after 6 months trealize you actually want to trade a different product etc. Also client trading really teaches you how to manage risk you dont want. When a client requests comes in you only have a couple minutes to price it, and it might be about something you dont really have an opinion of and havent analyzed. In a prop sense, you analyze trades and rteally build an argumnt for why you want to get into a position, its very proactive, whereas flow trading can be much more reactive, and you really learn how to dodge bullets that can blow you up, which is an ability that is useful if you would like to move to be a prop trader later.

inthe213:

did you have a quantitative/math background before coming in?
what are the bonuses like at Analyst-VP levels?

Cant talk about pay. I didnt really have a quant background, just economics. The need for a quant background is very overstated, what you need is an ability to work with numbers. The onlytime I do actual math is when im loooking at new ideas, and they might be a bit more complex, and so there are times where my desk is covered in equations.

Jan 18, 2013

So what are the differences between being an option trader at a BB vs one of the option market makers in Chicago (Wolverine, CTC, Optiver etc)

Jan 18, 2013

1) I'm just curious, is it difficult market making single stocks near earnings releases or similar events? How do you go around that?
2) Practically speaking, what do you do on the desk? I'd imagine that computers would do a lot of the execution nowadays. Do you ever have to "manually" make markets, if that makes any sense.

What books/resources would you recommend for an intermediate options player that's practical (Never worked on any desk, just learned about vol. etc. etc. by doing and failing.)

Thanks for doing this.

Jan 18, 2013
newbprosmonk:

1) I'm just curious, is it difficult market making single stocks near earnings releases or similar events? How do you go around that?
2) Practically speaking, what do you do on the desk? I'd imagine that computers would do a lot of the execution nowadays. Do you ever have to "manually" make markets, if that makes any sense.

What books/resources would you recommend for an intermediate options player that's practical (Never worked on any desk, just learned about vol. etc. etc. by doing and failing.)

Thanks for doing this.

Natenberg and Hull.

Jan 18, 2013

Why did you choose flow trading instead of prop shop?

Jan 18, 2013

did you have a quantitative/math background before coming in?
what are the bonuses like at Analyst-VP levels?

Jan 19, 2013

I'm not as familiar with equity markets (I trade FX Vol), and I'm wondering when you trade in brokers, do you exchange delta?

Also, is there any direct market? ie Call up GS to get a price in 1m 100s or something.

Jan 19, 2013
Revsly:

I'm not as familiar with equity markets (I trade FX Vol), and I'm wondering when you trade in brokers, do you exchange delta?

Also, is there any direct market? ie Call up GS to get a price in 1m 100s or something.

99% of the time you exchange delta. Every so often you see a market that is naked but you see that maybe once every couple of weeks.

There isnt an active direct market. There are times we do OTCs directly with other banks but its more an agreement we do at the end, so it started out as a broker trade but then sometimes one cpty says they need to do OTC etc, but in general very little is done OTC in equity options.

Jan 20, 2013
derivstrading:
Revsly:

I'm not as familiar with equity markets (I trade FX Vol), and I'm wondering when you trade in brokers, do you exchange delta?

Also, is there any direct market? ie Call up GS to get a price in 1m 100s or something.

99% of the time you exchange delta. Every so often you see a market that is naked but you see that maybe once every couple of weeks.

There isnt an active direct market. There are times we do OTCs directly with other banks but its more an agreement we do at the end, so it started out as a broker trade but then sometimes one cpty says they need to do OTC etc, but in general very little is done OTC in equity options.

Ok cool, the broker market is basically the same as us it seems.

FX has a very active direct market, in which you can ask a 2-way at any time from other banks. Basically very effective if you need to do a lot of size quickly. You don't HAVE to be in direct, nor do you have to show nice prices... but when you need to access the direct liquidity, other people will respond in-kind.

Jan 19, 2013

Hi,

You mentioned that the need for a quantitative degree is overstated. Would you mind naming some of the more quantitative desks and whether a non-quantitative degree would still be suitable?

Thanks!

Jan 20, 2013
JWick:

Hi,

You mentioned that the need for a quantitative degree is overstated. Would you mind naming some of the more quantitative desks and whether a non-quantitative degree would still be suitable?

Thanks!

The more quant desks in equities are: flow single stock exotics, flow index exotics (these two teams are generally split up into trading and pricing teams, the pricing teams are def more quant oriented while the trading less so), then you get more complex from tehre so structured products (trading and structuring), hybrids and so on. I would say you can survive on the flow exotics desks without a quant background, anything more than that youdo start to need some formal mathetmatical training. And on the flow exotics desk, you still do need quant ability up to the point you can unerstand the product back to front.

Jan 20, 2013

Hi - would you be interested in doing an interview for a new blog site offering advice to new traders?

Jan 20, 2013

Thanks for doing this Q&A, it's very helpful. Speaking with alumni, I've been advised to try to get on a vanilla options desk (whether it be credit, interest rates, equities, FX, etc.). The general advice has been that on an exotics desk, you only learn how to model and not really trade, whereas on a vanillas desk, you actually learn how to trade, which leads to better exit opportunities (hedge funds, prop shops, etc.). Is this true from your experience or are the skill sets you develop on vanilla and exotics desks essentially the same?

Also, when I visited trading floors, the traders seemed to specialize in one specific product. For example, on the fixed income exotics desk I visited, one guy only traded bermudans, one guy just traded inverse floaters, etc. On the vanilla options desk, one trader managed the gamma book and the other managed the vega book. I was wondering how a new trader is assigned to a specific product. I'm pretty sure you don't get to choose whether you want to trade the gamma or vega book. How is the assignment made, especially at the junior level?

Jan 20, 2013
nontarget kid:

Thanks for doing this Q&A, it's very helpful. Speaking with alumni, I've been advised to try to get on a vanilla options desk (whether it be credit, interest rates, equities, FX, etc.). The general advice has been that on an exotics desk, you only learn how to model and not really trade, whereas on a vanillas desk, you actually learn how to trade, which leads to better exit opportunities (hedge funds, prop shops, etc.). Is this true from your experience or are the skill sets you develop on vanilla and exotics desks essentially the same?

Also, when I visited trading floors, the traders seemed to specialize in one specific product. For example, on the fixed income exotics desk I visited, one guy only traded bermudans, one guy just traded inverse floaters, etc. On the vanilla options desk, one trader managed the gamma book and the other managed the vega book. I was wondering how a new trader is assigned to a specific product. I'm pretty sure you don't get to choose whether you want to trade the gamma or vega book. How is the assignment made, especially at the junior level?

1) Speaking in terms of equities, I think vanilla options book and the flow exotics book (these traders generally sit together or very close) is a great training ground in terms of actual trading. But I would say whenever you are managing risk you get a good trading education. If i had to advise which desk to join I would say the flow exotics book is the best place to start, because you can move from being a flow exotics trader to being a vanilla trader but it takes quite a bit of learnings to do the move the other way around. Because doing flow exotics teaches you about trading vanilla's.

2) I have never heard about splitting up a book by greek, except for FX desks where i have heard of a seperate rho book. In equities on the sector desk its split up by industry, you will have a TMT trader, financials etc. On the index desk generally all the guys cover all the indices as one team. Im guessing on some FICC options desks you can have much longer maturities, which leads to being able to split it up by maturity, and the rho risk is abit more prevalent etc etc.

Jan 20, 2013

Thanks for the advice. What I meant by the gamma book and the vega book was the short-term book and the long-term book, respectively. At least that's what I was told when I visited. W.r.t. the industry you end up trading in equities, how is the assignment made when you are hired full time on the desk?

Jan 20, 2013
nontarget kid:

Thanks for the advice. What I meant by the gamma book and the vega book was the short-term book and the long-term book, respectively. At least that's what I was told when I visited. W.r.t. the industry you end up trading in equities, how is the assignment made when you are hired full time on the desk?

As Revsly said, any trading assignment within a team is done by business need. There is no set time frame when u get a book or start to trade. Its a combination of someone leaving or some restructuring and the managers feeling they can trust you enough. In general you will first be assisting a senior trader, so you will be helping out on whatever he covers, and then someone might leave and if you have shown you can do a good jbo they will let you cover what the person leaving did.

Jan 20, 2013

My desk in FX, Vanillas and Flow Exotics are combined, so if you are a Vanilla trader you are responsible for the risk management of the exotics as well.

Yes, rates options are split between Gamma and Vega, but it just means the short dated vs long dated options, no more.

Usually you are hired to a desk as a generalist, and do whatever needs to get done. Then it is some combination of a spot that is open, what you want to do and what they think you are best suited for.

Mar 14, 2013

What are the exit ops for single stock options flow trading?

Mar 17, 2013
AuranB9:

What are the exit ops for single stock options flow trading?

anything you want as long as you work at it hehe

but honestly just like any desk its a limited skillset, but with a little bit more effort you can go into trading other derivatives. It gives ytou a good grounding in terms of company analysis as well as more quantitative analysis. FOrces you to learn about corporate actions, fundamentals of companies but also about how to manage a book of risk.

Mar 15, 2013

Which IDBs do you trade with? I've been looking to make the jump and an weighing the pros and cons of leaving ER for something where comp is more tied to performance than anything. Any insight on the interdealer world from your seat as the client?

Mar 15, 2013

Have you ever considered becoming a buyside trader eventually?

Mar 18, 2013

Hi derivstrading,

my question does not directly relate to options trading, more to trading in banks in general. As I understand it, "Flow" trading / market making is the biggest part of business the banks do. So as an institutional investor (mutual or hedge fund) why do I rely on banks to distribute my block orders for products that are not mainly traded in OTC markets when I could just as easily hire a programmer and set up an algorithm that could trade my block orders in exchanges or dark pools for smaller fees (and probably also faster)? With trading becoming more and more computerized, what is the competitive advantage traders in banks still have (besides the Sales teams)? To what extend to traders in banks use algorithms/HFT?

Also, when does your article "How to be a good intern" finally come out?

Since you are based in London, what do think about LSE MSc Finance vs. Imperial College MSc Finance for trading? Are there any guys from either of the two programs on your floor? How do you personally see the two programs?

Cheers and thanks for doing the Q&A!

Mar 29, 2013

when are single stock vol swaps going to be liquid again , let's bring back bespoke dispersion

Mar 29, 2013
vlition:

when are single stock vol swaps going to be liquid again , let's bring back bespoke dispersion

I dont see this in the near future. Single stock options arent liquid period at the moment in Europe. And most players do not really want to touch single stock vol swaps after the experiences of 08. The problem with single name vol/var swaps is the constant vega exposure as spot goes down. For example lets say a company gets near bankruptcy and drops from 100 to like 5, it is not uncommon for situations like these for these names to jump around in 100% increments because the stock price is so low. Now if you had sold regular options when the stock was at 100 you would be hurt on the move down, but at least that would be it and you would drop away from your vega exposure as you move away from the strike. But if you had sold a var/vol swap you would be killed on these huge moves when the stock is so low.

Mar 29, 2013

Mind addressing this one?

Which IDBs do you trade with? I've been looking to make the jump and an weighing the pros and cons of leaving ER for something where comp is more tied to performance than anything. Any insight on the interdealer world from your seat as the client?

Mar 30, 2013
beakerbeaker:

Mind addressing this one?

Which IDBs do you trade with? I've been looking to make the jump and an weighing the pros and cons of leaving ER for something where comp is more tied to performance than anything. Any insight on the interdealer world from your seat as the client?

Generally with IDBs have a couple that talk to regularly, whcih is composed of hte main ones (ie Exane, Icap, GFI, Cantor, Tullets etc), but see all broker flow so if some small broker has a quote im interested in talk to them then.

If you want to go into broking make sure you go to one of the major players, there have been TONS of small shops started but they are currently struggling.

Mar 31, 2013

What do you think are some of the recent trends that have affected S+T+Research?

Oct 16, 2017

For a beginner looking to get into S&T what would you suggest would be a good product to learn about?

Interest Rates, FX or Options?

"The markets are always changing , and they are always the same."

Oct 16, 2017
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