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Strategies & Market Trends : Waiting for the big Kahuna

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To: Real Man who wrote (81169)	9/20/2008 12:56:13 PM
From: Casaubon	Read Replies (2) of 94695

there is absolutely nothing written in stone about a market maker taking, or needing to take a market neutral hedging position (in particular shorting a stock) to balance my option position. In fact, a market maker is not required at all! The only thing that is required are two counter parties interested in placing a bet about market direction. When I sell puts, I am looking to take in time premium for assuming some risk. The counter party need not, and probably should not be a market maker. The counter party is looking to establish some downside risk to his long position or, outright bet that the stock will decline, over the contract timeframe. The opposite construction can be made with calls. In no way does this disrupt the quantity of shares that are in existence. Options are simply insurance policies bought and sold by counterparties. There is absolutely no need for an MM to short the underlying to "delta hedge" the position. You just need me and another guy wanting to take opposite sides of the trade. There's no need for market makers, no need for short sales of stock, and options provide a perfect mechanism for counterparties to hedge risk by betting on direction of price movement.

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