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Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: KeepItSimple who wrote (76551)	9/5/1999 1:24:00 AM
From: Bilow	Read Replies (1) \| Respond to of 164687

Hi KeepItSimple; About the downgrade in the convertible junk bonds. Since those bonds are trading under par by 15%, someone has lost some money. It kind of surprises me to see them get sort of a downgrade. Regarding those options MMs. I used to trade next to one (he previously traded on the floor of the CBOE), and he certainly wasn't a big player. He also didn't carry around big unhedged positions. Probably one of the most careful traders I've known. After he left options trading for daytrading, he still had a lot of left over positions in options, mostly naked writes (i.e. he sold options short). He was waiting for the time premiums to decay in these positions, and I guess he didn't want to give up the spread to the other MMs. Each day, he would watch the stock price, and adjust his position in the underlying stock. His broker or whatever, had some sort of computer program to keep track of all this, so when he got a statement, it included his net position, and the delta and gamma calculations. Perhaps a garbled explanation is in order. The "delta" is the number of pennies that the theoretical value of an option increases or decreases in value when the underlying equity changes in value by one penny. So if you had 11 contracts of AMZN puts, and they had a delta of 0.47 (which corresponds to puts with a strike about at the money), you could hedge it with a short of 111000.47 = 517 shares, for example. He was hedged for that kind of risk, but also kept track of the next level of risk, which corresponds to changes in the delta of the options, or the "gamma." I got the impression that making market in options was mostly about making the spread off of the retail clients, not about taking big risks. This is consistent with what I know about how market makers work in the stock market, as well. -- Carl