Market Makers MO
How Does An Options Market Maker Manage Their Book?
Pretend that you are an options market maker, i.e., at any time you are ready to buy or sell options on demand. You maintain liquidity, manage bid/offer spreads, and more or less maintain an orderly market. And for your trouble, you consistently and almost instantly earn the bid/offer spread. Sell on the offer and buy on the bid for long enough, and the cents start adding up to real money. Of course, this requires good two-sided volume and very fast execution. For liquid options with super-fast electronic trading on multiple exchanges, that’s usually not a problem.
But what if you’re making markets in illiquid options with volatile prices, such as in certain commodities, or in thin, out-of-the-money strikes? Then you probably won’t be able to instantly offset your position. The prospect of holding the position for some time, or warehousing it, then becomes very real.
In this case, the market maker’s book may contain multiple options positions with varying strikes, volumes, and expirations, all of which need to be hedged. The ability to effectively hedge multiple options positions at once and in a variable price and implied volatilty environment then becomes key. This skill is what differentiates institutional options traders from their retail counterparts.
How do they hedge multiple options at once? Mostly, by regarding their book not as a collection of individual positions (which could number in the 100s or more), but aggregated into groups by stock or commodity, or sometimes, sector. In some cases, options will be grouped into short, medium, or long term expirations. Whichever aggregation is selected, the Greeks (delta, theta, vega, and gamma) of the individual positions are then netted and the overall net sensitivity to the market determined. At that point, the market maker (really more of a prop trader) will determine how much of the underlying, time decay, volatilty, or gamma to hedge off. It then becomes a balancing act between the four of them. Since the hedges require constant monitoring and adjustment as market conditions change, effectively managing the portfolio becomes a full time job.
Obviously, it’s a lot more complicated than the thumbnail sketch I outlined above. But as you can tell, managing a large, diverse options book is a vastly different trading exercise than picking which options strategy best fits your view of the market. However, for retail investors, and especially for those that have multiple positions or are trading non-standard options, it’s important, and educational, to know what the market makers are up to.
How Much Money Does Elon Musk Really Have?
According to the Bloomberg Billionaires Index, Elon Musk is currently worth about $436 billion. By any standard, that’s a lot of money. Consider:
· If he turned it all into cash (somehow), and earned only 5%, non-compounded, he would be earning $59,726,027 per day, or $691 per second. Not bad for a day’s work!
· Put another way, if Elon Musk were a country, he would be ranked 35th worldwide in GDP, ahead of Denmark and Ireland, and closing in on Austria.
Does that make Musk wealthier than the richest person of the 19th and 20th centuries, John D. Rockefeller? Hard to say, especially when measured as a percentage of US GDP. Musk’s wealth is running at about 1.6% of GDP; Rockefeller’s was 1.5%. Whether Musk will stay ahead is an open question since most of his wealth is tied to the valuation of Tesla and SpaceX. Also, he’s only 53; he’s got some time before reaching the finish line. Time will tell, as it always does.