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If market makers make Billions why isn't everyone in the market making
business. The one market making firm that attempted to come public showed a
profit last year of about $50 Million on a capital base of $100 Million
leveraged up to $1.4 billion. So that their ROI was about 3%. The business of
market making should return about the rate earned on T Bills .. the money is
made in the ability to leverage. A fully hedged floor trader can get leverage,
if fully hedged, in the neighborhood of 20 - 1.
kohath wrote:
> The facts, I believe, on the options market is that the options market
> makers make tons and tons of money. I heard that last year and the year
> before they made several billion on the internet options. Just look at the
> way the options are traded. 50 cent to 2 dollar spread. If the market
> starts heading down/up in the morning the options market makers will not
> open the market for the first half hour, to maximize their profits/minimize
> their loses. The market makers charge a 10% to 20% premium on options on I
> would submit an educated guess of 75% of the time in the morning. (Watch
> the price change from 9:30 to 10:00, I never buy options before 10:00
> because of this). When the market is headed up they charge a premium on the
> calls, and the minute the market reverses they dump the price on the calls,
> to keep the suckers locked in. Same with the puts/market headed down.
> (That is why you can make more selling options than buying, with much more
> risk). You can buy a call at 5 X 5 1/8 in a quite market, the minute the
> market starts moving, the price changes to 4.75 to 5.25. The market makers
> don't make the 200%+ that a trader can, but they make that 5% to 15%
> hundreds/thousands of times per day, so the 200%+ is peanuts to them.
> Kohath
>
> ----- Original Message -----
> From: THE DOCTOR <droex@xxxxxxxxxxxx>
> To: Chris Jackson <chrisj@xxxxxxxxxx>
> Cc: BrentinUtahsDixie <brente@xxxxxxxxxxxx>; Group, Real Traders 2000
> <Realtraders@xxxxxxxxxxxxx>; <realtraders@xxxxxxxxxxxx>
> Sent: Thursday, July 29, 1999 1:48 PM
> Subject: Re: Exits/Options
>
> > An options pricing generates a price which - by definition -creates equal
> > probability for the buy and the seller. The concept of an options model
> is to
> > calculate a value which if you traded at with an infinite number of
> repetitions
> > would balance out exactly between buyer and sell.
> >
> > What most people confuse is the concept of how frequently buyers/sellers
> will make
> > money. Sellers of options will be profitable more frequently than buyers
> ... but
> > sellers can only earn a finite premium and can lose a multiple of the
> premium they
> > might earn. Buyers will be profitable on less occasions than sellers, but
> buyers
> > can only lose their premium and can earn a multiple of their invested
> premium.
> >
> > Buyers will make money when actual volatility exceeds implied(as has been
> the case
> > in the US equity market for much of the last 5 years). Sellers will
> profit when
> > actual is less than implied(a condition you would expect to exist most of
> the time
> > .... in effect about 2/3 of the time the market or stock should make a 1
> sigma
> > move or less over the life of the option). The challenge is that you only
> really
> > get the balance between buyers and sellers when you sample a large
> population of
> > trades over a long period of time.
> >
> > The reality as to if you should buy or sell is based both on you
> expectation of
> > direction(bullish, bearish or neutral)and your view of volatility over the
> expected
> > life of you trade.
> >
> > Chris Jackson wrote:
> >
> > > I have just read the new options book by William Gallagher - The Options
> Edge.
> > > He did
> > > an empirical study of actual traded options prices ( 1 on 15 futures
> > > markets) and it came out that there was no clear bias for option writers
> or
> > > buyers -
> > > something of a shock even to him.
> > >
> > > The positive side of that is that there does not appear such a bias to
> overcome
> > > when
> > > buying options i.e. makes buying the right kind of options a reasonable
> > > proposition.
> > >
> > > BrentinUtahsDixie wrote:
> > >
> > > > If you know you have a weekness exiting trades then you should
> emphasize
> > > > that and vice versa.
> > > >
> > > > This is overworking a fine point regarding entrys and exits but one of
> the
> > > > things that happens when learning about trading is that someone comes
> along
> > > > and makes a statement that sounds true on the surface and then many
> others
> > > > pick it up and go around stateing it as fact when it may not be
> factual at
> > > > all. Things like "90% of all options expire worthless" and "the market
> is
> > > > never wrong". You should question these kind of statements rather then
> > > > parroting them. If you find youself doing this without questioning and
> > > > seriously thinking about the issue then you are also likely to be a
> trader
> > > > that is always jumping in the market with the wrong crowd at the wrong
> time
> > > > just because someone said it was good idea, not because you did your
> own
> > > > research and developed your own skill at timming your entrys.
> > > >
> > > > Brent
> >
> >
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