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And yet you'd still have a functioning option market, which is the point in question. You don't have to hedge delta in short shares of the underlier in order t

And yet you'd still have a functioning option market, which is the point in question. You don't have to hedge delta in short shares of the underlier in order to deal options. You can hedge out using your long shares, and then do the remainder in a correlated instrument or leave it without a hedge. For a pure market maker who simply buys and sells to earn spread, hedging is a means of managing P&L variance and protecting oneself against negative selection bias. Similarly, you also don't have to hedge converts in options. I'm not sure I understand your point about underwriting. Due to regulations, options don't start trading until several days after an IPO. Options on spinoffs tend to list more quickly, but are delayed as well. Secondary issuances have the advantage of already seeing where the market priced the stock, and are generally small, so there's no need to have a tight options market to hedge them.

JumpCrisscross 8y ago
> you'd still have a functioning option market Most of the time. Professional options market makers would be degraded. (As an aside, you'd also spawn systemic risks. Increased market-making risk favors small shops; access to inventory large. To bridge the gap, shorting would be replicated–more expensively, less transparently, and more riskily–through banks swapping their inventory to funds writing options. Add in your suggestion that hedging rely on historical correlations and you have a recipe for a preventable crisis.) On underwriting, secondary issuances for seasoned issuers don't require options markets. But it reduces risk. That, in turn, reduces the cost of market access. Australia's short-seeing ban "reduced trading activity, increased bid and ask spreads and increased intraday volatility" while providing "no evidence for lasting price support from the restrictions" [1]. It's a stupid idea that raises costs for everyone while sounding cute to the naive. [1] https://epublications.bond.edu.au/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1532&context=business_pubs https://epublications.bond.edu.au/cgi/viewcontent.cgi?refere...

JumpCrisscross 8y ago

> you'd still have a functioning option market Most of the time. Professional options market makers would be degraded. (As an aside, you'd also spawn systemic risks. Increased market-making risk favors small shops; access to inventory large. To bridge the gap, shorting would be replicated–more expensively, less transparently, and more riskily–through banks swapping their inventory to funds writing options. Add in your suggestion that hedging rely on historical correlations and you have a recipe for a preventable crisis.) On underwriting, secondary issuances for seasoned issuers don't require options markets. But it reduces risk. That, in turn, reduces the cost of market access. Australia's short-seeing ban "reduced trading activity, increased bid and ask spreads and increased intraday volatility" while providing "no evidence for lasting price support from the restrictions" [1]. It's a stupid idea that raises costs for everyone while sounding cute to the naive. [1] https://epublications.bond.edu.au/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1532&context=business_pubs https://epublications.bond.edu.au/cgi/viewcontent.cgi?refere...