To: Gregg who wrote (9776 ) 3/3/1998 11:32:00 PM From: Robert Graham Read Replies (3) | Respond to
The hedging effects of the MM during options expiration I am finding is very well known by the professionals and the very experienced option players, but unfortunately not described very well in anything I have come across. Many option players do not understand what happens during expiration or how the MM makes a market in the option. Oddly enough, I do not think they want to know. Earlier on in my adventure with options what I had to do was work through in my head how options must be handled during options expiration by the MM, which actually is not that difficult to do once I understood how options operated in the marketplace. All I had to do is place myself in the shoes of the MM. I then verified what I can up with by talking to a registered option specialist that works as a desk trader for a brokerage firm. In the mean time, this picture of options expiration has been verified in all of the books and online commentary that I have read, including that of James Cramer. The observable market effects of this options expiration process also supports this model of MM hedging, which is the only way that the MM can protect themselves during this period of time as one who has to take the other side of the trade on an expiring option the day it expires. This area of options is covered only in a sparse way in the material about options that is available to be read. So you have to read this part very carefully to understand what is being said about options expiration. By the way, the market maker will also have to hedge if they take on a significant position in an illiquid option. They do this in the same way as their handling of the option expiration process: by selling stock. Then all they do is exersize the option to cover their short.
