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Would buying an option be less risky for the broker? Even when they enable "risk management" do you think they would halt option trading? I'm no expert so I'm

Would buying an option be less risky for the broker? Even when they enable "risk management" do you think they would halt option trading? I'm no expert so I'm just speculating here. IIRC, an option is you making an agreement with some entity to say "hey here is $X (2-5%) for you to hold on to (PUT?) or to let me buy (CALL?) within the next 2 weeks." The difference between that and a classic "short" is that you never actually hold the stock/asset with an option. (IIRC, a short means you buy and sell but need to cover within X days.) I'm probably wrong on some level here. For this thread though I think others would probably enjoy some more explanations about how profiting in a decreasing market works because it's always trickier than with traditional "up and to the right" one. Cheers!

traceroute66 5y ago
> Would buying an option be less risky for the broker? Even when they enable "risk management" do you think they would halt option trading? With the caveat that whilst I'm familiar with the financial sector, I'm no expert in structured products... My understanding is that if the broker has sufficient internal volume, then what will happen is they will just Net-Net internally. By that I mean match trades, i.e. Alice puts on a Buy for 10 and Bob puts on a Sell for 10 (or <10). By definition its not possible for both of them to "win", so the "loser" will pay the other person's winnings as well as the broker's commission. If there is insufficient volume whether due to lack of clients or a particular product is particularly volatile / illiquid, then the broker may then take steps to hedge externally. In that case yes, they may use options, futures, swaps or any other derivative products (typically they only use derivatives to hedge, but sometimes they might use physical trades). Regarding halting trading, typically this is only done in extreme circumstances where they themselves cannot get a handle on what's going on (see the unexpected unpegging of the Swiss Franc for a good example). Otherwise in most cases, what will normally happen is they will ramp up the margin requirements which will (a) discourage most traders (b) provide them with enough breathing space for the traders that still wish to participate.

traceroute66 5y ago

> Would buying an option be less risky for the broker? Even when they enable "risk management" do you think they would halt option trading? With the caveat that whilst I'm familiar with the financial sector, I'm no expert in structured products... My understanding is that if the broker has sufficient internal volume, then what will happen is they will just Net-Net internally. By that I mean match trades, i.e. Alice puts on a Buy for 10 and Bob puts on a Sell for 10 (or <10). By definition its not possible for both of them to "win", so the "loser" will pay the other person's winnings as well as the broker's commission. If there is insufficient volume whether due to lack of clients or a particular product is particularly volatile / illiquid, then the broker may then take steps to hedge externally. In that case yes, they may use options, futures, swaps or any other derivative products (typically they only use derivatives to hedge, but sometimes they might use physical trades). Regarding halting trading, typically this is only done in extreme circumstances where they themselves cannot get a handle on what's going on (see the unexpected unpegging of the Swiss Franc for a good example). Otherwise in most cases, what will normally happen is they will ramp up the margin requirements which will (a) discourage most traders (b) provide them with enough breathing space for the traders that still wish to participate.