Market making options. Same Motivation, Different MO

But really they are professionals paid to take risk and provide market liquidity.

  • The market maker both sells to and also buys from its clients and is compensated by means of price differentials for the service of providing liquidityreducing transaction costs and facilitating trade.
  • "Быть может, мне показалось?" - спросила себя Напрягая глаза, она вглядывалась в полумрак справа от себя, пытаясь выявить источник звука.
  • Barclays Says Goodbye to Equity Options Market Making Business

In The Wizard of Oz, Dorothy and her friends go to see the all-powerful wizard believing that he can solve their problems. Instead, they discover that the man behind the curtain is simply an elderly illusionist. And why are they willing to do it? Retail traders choose to enter any position they like, using any stock and any option strategy that they fancy.

The Role of Market Makers

For some, this begs the question: is options trading a zero-sum game? If a retail trader sells, say, a call option, and a market maker buys that call option, can there be only one winner and one loser, or can both sides potentially profit?

Suppose a retail trader who owns shares of a stock decides to sell a covered call, which is a common strategy. For illustrative purposes only. Past performance does not guarantee future results.

Ken Griffin on the Role of Market Makers

Note the left-hand column of figure 1, Prob OTM, which is, you guessed it, an estimate of the probability an option will be out-of-the-money OTM at expiration. Now, assume market making options a market maker takes the other side of this trade and buys the call option. Does he know something that the retail trader does not? Not likely. The answer lies in the fact that an option is a derivative—its price is derived from the underlying stock, and that stock can be used to hedge the position.

How Do Market Makers Operate?

Market makers hedge the risk of option trades by simultaneously buying or selling stock. In this example, the market maker could sell shares of stock short to possibly help offset the risk of buying the call option. If the price of the stock declines, the loss on the call option might be offset by the gain in the short stock position used as a hedge.

market making options

In theory, both sides can potentially market making options from being on opposite sides of the same trade depending on the steps they take to hedge their respective positions.

It all comes down to market maker tactics and market making strategies, and how they may differ from those of retail traders. At the base level, both have the same objectives: maximizing returns and managing risks.

market making options

How they go about it can differ. Refer back to figure 1. A market maker who can buy below and sell above theoretical value can, over time, come out ahead.


Consider a roulette wheel. It has 38 spaces, and the house typically pays out to Sometimes the house makes a big payout, sometimes a small one, and sometimes the house collects. But each time, the house has a slight mathematical advantage.

So, over time, the house makes money, even though some individual players might do well. Think of a farmer who has a lot of corn to sell.

market making options

The person on the other side of the curtain does not have all the answers. Options market makers are simply professional traders who might think market making options their positions a little differently than you do.

  • A market maker MM is a firm or individual who actively quotes two-sided markets in a security, providing bids and offers known as asks along with the market size of each.
  • Read Review Visit Broker The Role of Market Makers The basic role of market makers in the options exchanges is to ensure that the markets run smoothly by enabling traders to buy and sell options even if there are no public orders to match the required trade.
  • Market maker - Wikipedia