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Strategies & Market Trends : The Options Box -- Ignore unavailable to you. Want to Upgrade?

To: jj_ who wrote (9315)	1/27/2001 8:56:35 PM
From: hobo	Read Replies (2) \| Respond to of 10876

I am relatively new to the Options game (2 years). I quickly learned that the market makers do have some sort of exclusive club to do what they want. in my opinion, unless all option markets are linked in their bids/asks there will never be uniformity and there will always be the opportunity to play games. unfortunately, at this point i do not have access to the software that would allow me to seek and select the best pricing available in all 4 markets. Cybercorp claims they do. there is a "learning curve" to learn their software. at the moment there are personal issues that prevent me to take on yet another task. in other words i have my plate filled. i trade with Schwab. if i want to go to the market that has the best pricing, i have to call a live broker and select which market to place it, obviously this causes the commission to be higher. starting April 1st Schwab will reduce the options commissions, this, i assume it will help. still... once i resolve the pending outside stuff that prevents me from concentrating on the Cybercorp learning curve. this seems the better route. however the real problem is the fact that the exchanges are not linked. they say "its coming" i ask when ? they say don't know. fight them ? i do not know... i take this to be part of the cost of doing business, not fair, but practically what can i do ? i say.... if i cannot pay the commission, may be i should not be trading. i am not "giving up" i am just being practical. i try to go with the most liquid, and (within reason), most volatile premiums. perhaps this issue of the "game m/m play has not affected me as much.... perhaps it does not affect me as much since i prefer to be on the sell side of the trading, which puts me on time's side (i.e. time decay). yes, i understand the added risks. so far, so good. i have held a theory that as a seller the odds are more than slightly in my favor due to the volatile market we have seen and the time decay factor... what also helps it has been the "proper" selection of strike prices. (i. e. resistance points, level of premium received, etc). statisticians say.... it is a 50/50 % chance i have tried to play a tight game and yes, there have been some losses too. can't win them all. (but i try -G-) looking forward, on the positive side as you indicate, the options market is getting bigger and bigger every year with more participants and more products. this, will eventually bring more clarity to the game. This probably sounds like sourgrapes but they wouldn't get away with 1/10 of the garbage they pull on the option exchanges under the grey umbrella of "volatility" on any other exchange. the gray umbrella indeed... on a related subject... Well... with all due respect to the "Chicago boys" and their space age formulas for options pricing, including the Nobel prize etc etc etc ... how the hell do you calculate (accurately I mean), something as "airy" as Volatility...? they tell me that the chaos theory can do that stuff blah blah blah... Volatility is an "opinion... " or rather a standard deviation of a consensus.. or something to that effect. well, that's good, but if some pedestrian market maker does not give you the pricing that your space age option pricing formula gives you ... your choice is... not trade or trade at what the market says... I am not disregarding option pricing at all. i am just trying to give its proper prospective. at times, markets move so fast, that option-pricing models are like Volkswagens competing with Ferraris.... my opinion

To: jj_ who wrote (9315)	1/31/2001 9:08:49 PM
From: dli	Read Replies (1) \| Respond to of 10876

First and foremost your post reveals a total lack of understanding of option pricing and market making. Who's to keep the MM's from putting a $5 by $6 on a option and not moving it during a week of the underlying moving up because they know the next week they can reduce it on a stock pull back and a reduced delta. Their survival instincts. If an MM attempted to do that he's capital would be gone in no time as such practice would open up riskless arbitrage opportunities especiall on multiple listed options. Also MMs always hedge their positions to stay delta neutral. They do not speculate on a stock's direction especially not a week out. I had a option I bought at .625 go backwards to .375 as the stock moved from 74 to 82. I had 200 contracts and should have booked 20k-30k profits based on how the contracts were moving on Monday when I purchased them but on Tuesday all 5 exchanges had adjusted the contracts back 50% while the stock moved the other way. I said fk it and took a small loss but what I began to notice was the MM's are not moving the options with the underlying this month and when they do even a little they are using a big spreads of $1 minimum. There's a few more factors than just the price of the underlying that determine an option's price. There's frequently very pronounced vertical volatility skews and far OTM options are usually most affected. So a volatility implosion as the underlying approaches the strike is nothing unusual. That's why it pays to run an option through a pricing model instead of just blindly purchasing it. Dave