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Strategies & Market Trends : From the Trading Desk -- Ignore unavailable to you. Want to Upgrade?

To: Jim Lass who wrote (2788)	3/31/1998 7:28:00 AM
From: steve goldman	Read Replies (1) \| Respond to of 4969

Jim, Thanks for the note: I am one of the options principals in here but nonetheless, there are no exact sciences in trading: 1. How do mm's hedge? First off, good use of lingo. In stocks, the players on floor who make markets are called specialists. In options, the player son the floor who make markets are market makers. They usually hedge buy having buyers or sellerrs coming in at any one time, by being only required to do 10 contracts at a particular price then they are given good leeway in updating their quote. They want order flow, buys and sells coming in. On an INTC, no problem. But on less active options can be rough for mm if the stock moves against. 2. Most exchanges upon which options trade, want there to be liquidity so as to enhance the market. ie. what good is a bid if yuou cant sell stock at that bid. Most have an "auto-exec' system for 10 contracts...ie. bid 10 x 10 1/4 offered...want to sell 10 at 10 , if you broker dealer is using an auto system and not try ing to skimp by holding the order in the crowd, you shouldbe filled in seconds. From my terminal, its pretty fast, not as fast as soes, which is instantaneous if there is no cue, but two, three seconds fast. CBOES calls it RAES, Amex and pcoast have another system, etc. Larger tickets - well, first off, this and the items above, are where it is worth the few extra bucks to have a firm like Yamner working the order. There are a few ways to work it. On a large piece, you could do 10 on the auto-exec system, wait and then do ten more, etc. but you will probably weaken the contract an 1/8 or more, depending on liquidty. One way to do it would be to have a floor broker try to work the ticket a bit, sensing if there is a decent buyer foryour piece. As well, the BEST of all worlds would be if the option were 10 x 10 3/8, for example, and the floor broker could get the mm to agree to "stop you at 10 to work". This means that the mm feels comfortable in taking in stock at 10, rather than YOU competing against her, offering inbetween and then smacking here at 10 when you get desperate, she will guarantee you 10, and she'll work the order. If she can get 10 1/4, 10 3/8, she'll give you 10 1/8 or so. Now you say, well if she can get 10 1/4, why don't I just go for the 10 1/4? Sure, go for it, but the difference is she stopped you., she promised you 10 at very very worst. if stock tanks, you still get 10, and she eats it. You've hedged. youtook 10 on downside with onnly limiting upside an 1/8th. Working orders like this is really only something a firm like ours will do for you. No electronic firm can handle this type of transaction efficiently. Regards, Steve@yamner.com yamner.com