3 ms·
Options are crucial for price discovery. naturally their value goes up in the face of uncertainty. As a mm you don’t have to buy the underlying to cover short
by naveen99 6y ago
Options are crucial for price discovery. naturally their value goes up in the face of uncertainty. As a mm you don’t have to buy the underlying to cover short calls, you can also buy less far out calls, as long as the black scholes price for the spread is favorable.
- smallnamespace 6y agoA particular MM might lay off the call risk by purchasing a call, but all they're doing is passing the risk on to a different MM. There aren't that many natural vol sellers (hedge funds, mostly? and implicitly the Fed), so MMs as a group have the function of converting implied vol into realized vol via their delta hedging activities.
- naveen99 6y agoshares are just long dated calls. There are plenty of routine covered call writers running the wheel from wealth managers to boomers like my dad. But you are right that to you need to have the capital to face early assignment if you are short and the capital to take delivery if you are long volatility and liquidity is low relatively.
- PhantomGremlin 6y agoAs a mm you don’t have to buy the underlying to cover short calls Yes you're absolutely right. The beauty of being a market maker is you only need to hedge across the entirely of your exposure to a particular equity. The more different options you sell on a particular equity, the easier it becomes to hedge your net exposure.