6 ms·

The way to get rich by options trading is to make a market in them, to aim to be as neutral as possible on your greeks and to take bid/ask spread, and to do thi

The way to get rich by options trading is to make a market in them, to aim to be as neutral as possible on your greeks and to take bid/ask spread, and to do this with extremely high-quality real-time risk analytics systems, first-line trading oversight and second-line risk management oversight. In other words, it's to be an equity volatility trading desk.

rr888 4y ago
> it's to be an equity volatility trading desk There are already a lot of real professional trading desks doing this. How can you compete with them?
- jovial_cavalier 4y ago
  Put in limit orders that are way out of line and pray for unsophisticated takers?
  - filoleg 4y ago
    Exchanges are legally obligated to provide the best possible buy/sell quotes to people, so this is not gonna work. For illustration purposes, imagine you own shares of a ticker that trades around $150/share, with a bid-ask gap of $1. So the lowest sell order is sitting at $150.50, and the highest buy order is sitting at $149.50. Now, imagine you queue in your way out limit sell order at $200, and then some unsophisticated trader submits their limit buy order at $201. Your limit sell won't trigger, until the entire queue of sell orders sorted by increasing prices (starting at $150.50) gets filled first. If that unsophisticated trader wanted just one share, they will get that one share at $150.50. The whole idea of a limit buy order at $201 is that it will execute at the cheapest available price, as long as it is below $201. Similarly with limit sell orders, your $200 limit sell will execute only at the edge of bid-ask gap price, as long as the cheapest available ask is at $200 and meets the bid at that number. Until that moment, for every buyer, the queue will be processing all the cheaper ask prices first, until it chews through all of them (which would pump the stock enough to reach your limit sell price).
    - jovial_cavalier 4y ago
      The width of your spread should be inversely proportional to your certainty about the price level. If you are an unsophisticated maker, you have to quote wider, and yes you will probably get hit very very rarely. But occasionally someone comes through and just needs to unload something as quick as possible, and they will put in a market order to basically take the whole one side of the book and trade down to your level. Obviously not super profitable, but not losing either! If I knew an easy way to make markets as a retail trader and be wildly successful, I wouldn't blab about it ;)
dsfyu404ed 4y ago
This is terrible advice for a retail trader. Don't pick a fight with the pros. Find a dusty corner they don't care about and pick up the scraps. (this rule applies well to a lot of professions, not just high finance)
- MuffinFlavored 4y ago
  If they have the technology to win the hard stuff, why would they not spend the extra few minutes to also "cover the scrap" areas as well?
- NovemberWhiskey 4y ago
  It's not advice for a retail trader; it's advice not to be a retail trader.
  - MuffinFlavored 4y ago
    It's advice for a retail trader on what they are up against, and it confuses me greatly on how retail traders can look at all of the evidence that they shouldn't, and they still do.
    - ISL 4y ago
      I find that my perspective is generally recalibrated each time I observe a professional or professional organization in a field where I think I mostly understand how it works. It takes seeing how some of the second-order effects matter in order to get an inkling of just how much you don't know. As an approximate programming example, imagine the difference in productivity between a programmer coming out of high school and someone with a couple decades experience with access to version-control, profilers, documentation, a clear understanding of best-practices, who works on a team of five people who will all do the same job, and has access to $1M in AWS credits. Can the young programmer compete? In principle. Can they deliver on time, every time, for their clients without making a gaffe like the team of programmers can? Probably not.
    - jeffreyrogers 4y ago
MuffinFlavored 4y ago
That is one way/the best way to make money options trading. Is there any wiggle room in that statement for the alternative? If retail options traders come out ahead winning overall 15% of the time... is that worth pouring time into? It becomes a personal decision on whether you should risk your resources/time given those odds. The question I have is... why do some people win and some people lose? It can't just be luck.
- horsawlarway 4y ago
  I mean... It really can just be luck. Even the absolute rock star traders have a nasty habit of regressing to the mean on a long enough time line. It just turns out that when you have a several million participants - some of them have "a long enough time line" of 30+ years.
  - pmoriarty 4y ago
    "It really can just be luck" ...well, luck or insider trading.
    - filoleg 4y ago
      For every option and share bought, there is someone who sold it on the other end. Doesn't require much insider trading, given that for every trade that went poorly on one side, it went well for the person on the other side of it. Whether it went poorly on the sell or buy side, it doesn't matter. Given this, you can see why there are just actual purely statistical reasons for tons of trades going well with zero insider trading needed for that. Half of them are bound to do well. Whether you can consistently stay on the "good side" of your trades is a separate story, though. P.S. Not trying to deny that insider trading exists, but its prevalency tends to be extremely overblown.
vgt 4y ago
(I worked in equity options market making in the past) I'm not sure this is such a good idea. Professional companies that do equity options market making have major natural advantages over you: - They are at the front of the line of any order if they're on the NBBO, so they're going to capture the spread - They get order flow from offline brokers, which tends to be high volume and have higher edge - They do gobs of volume every day and hope to make a fraction of a penny per transaction. - A typical market maker makes markets in 500+ stocks at any one time. Good luck doing that on your own. - They've invested in being as physically close to the actual exchanges as possible so that they can be first to respond - They're rarely greeks neutral beyond delta - As registered market makers, they have tax advantages you do not
- H8crilA 4y ago
  Do you think that the (often criticized, perhaps way too much) ability to sell naked short is meaningful too?
  - vgt 4y ago
    I've heard this strategy referred to as "picking up pennies in front of a steamroller" - it works until the CEO is discovered to be a fraud, goes to jail, and stock loses 80% of its value in a week. Then you lose everything on a single position. Market makers do this as a free way to cover delta risk in that direction. If you have +100 delta, selling 100 "units" (way out of the money options) is a nice way and doesn't carry any other greeks. I've seen speculators do this, but they're playing with fire. I've seen an investor risk 9 digits to pick up $50k a minute before strike expiration, not realizing that the actual settlement is the next day (so adversarial events can still happen).
    - moneywoes 4y ago
      If the expected value is positive that means in the long run it should be fine right?
      - vgt 4y ago

rr888 4y ago

> it's to be an equity volatility trading desk There are already a lot of real professional trading desks doing this. How can you compete with them?

jovial_cavalier 4y ago
Put in limit orders that are way out of line and pray for unsophisticated takers?
- filoleg 4y ago
  Exchanges are legally obligated to provide the best possible buy/sell quotes to people, so this is not gonna work. For illustration purposes, imagine you own shares of a ticker that trades around $150/share, with a bid-ask gap of $1. So the lowest sell order is sitting at $150.50, and the highest buy order is sitting at $149.50. Now, imagine you queue in your way out limit sell order at $200, and then some unsophisticated trader submits their limit buy order at $201. Your limit sell won't trigger, until the entire queue of sell orders sorted by increasing prices (starting at $150.50) gets filled first. If that unsophisticated trader wanted just one share, they will get that one share at $150.50. The whole idea of a limit buy order at $201 is that it will execute at the cheapest available price, as long as it is below $201. Similarly with limit sell orders, your $200 limit sell will execute only at the edge of bid-ask gap price, as long as the cheapest available ask is at $200 and meets the bid at that number. Until that moment, for every buyer, the queue will be processing all the cheaper ask prices first, until it chews through all of them (which would pump the stock enough to reach your limit sell price).
  - jovial_cavalier 4y ago
    The width of your spread should be inversely proportional to your certainty about the price level. If you are an unsophisticated maker, you have to quote wider, and yes you will probably get hit very very rarely. But occasionally someone comes through and just needs to unload something as quick as possible, and they will put in a market order to basically take the whole one side of the book and trade down to your level. Obviously not super profitable, but not losing either! If I knew an easy way to make markets as a retail trader and be wildly successful, I wouldn't blab about it ;)

dsfyu404ed 4y ago

This is terrible advice for a retail trader. Don't pick a fight with the pros. Find a dusty corner they don't care about and pick up the scraps. (this rule applies well to a lot of professions, not just high finance)

MuffinFlavored 4y ago
If they have the technology to win the hard stuff, why would they not spend the extra few minutes to also "cover the scrap" areas as well?
NovemberWhiskey 4y ago
It's not advice for a retail trader; it's advice not to be a retail trader.
- MuffinFlavored 4y ago
  It's advice for a retail trader on what they are up against, and it confuses me greatly on how retail traders can look at all of the evidence that they shouldn't, and they still do.
  - ISL 4y ago
    I find that my perspective is generally recalibrated each time I observe a professional or professional organization in a field where I think I mostly understand how it works. It takes seeing how some of the second-order effects matter in order to get an inkling of just how much you don't know. As an approximate programming example, imagine the difference in productivity between a programmer coming out of high school and someone with a couple decades experience with access to version-control, profilers, documentation, a clear understanding of best-practices, who works on a team of five people who will all do the same job, and has access to $1M in AWS credits. Can the young programmer compete? In principle. Can they deliver on time, every time, for their clients without making a gaffe like the team of programmers can? Probably not.
  - jeffreyrogers 4y ago

MuffinFlavored 4y ago

That is one way/the best way to make money options trading. Is there any wiggle room in that statement for the alternative? If retail options traders come out ahead winning overall 15% of the time... is that worth pouring time into? It becomes a personal decision on whether you should risk your resources/time given those odds. The question I have is... why do some people win and some people lose? It can't just be luck.

horsawlarway 4y ago
I mean... It really can just be luck. Even the absolute rock star traders have a nasty habit of regressing to the mean on a long enough time line. It just turns out that when you have a several million participants - some of them have "a long enough time line" of 30+ years.
- pmoriarty 4y ago
  "It really can just be luck" ...well, luck or insider trading.
  - filoleg 4y ago
    For every option and share bought, there is someone who sold it on the other end. Doesn't require much insider trading, given that for every trade that went poorly on one side, it went well for the person on the other side of it. Whether it went poorly on the sell or buy side, it doesn't matter. Given this, you can see why there are just actual purely statistical reasons for tons of trades going well with zero insider trading needed for that. Half of them are bound to do well. Whether you can consistently stay on the "good side" of your trades is a separate story, though. P.S. Not trying to deny that insider trading exists, but its prevalency tends to be extremely overblown.

vgt 4y ago

(I worked in equity options market making in the past) I'm not sure this is such a good idea. Professional companies that do equity options market making have major natural advantages over you: - They are at the front of the line of any order if they're on the NBBO, so they're going to capture the spread - They get order flow from offline brokers, which tends to be high volume and have higher edge - They do gobs of volume every day and hope to make a fraction of a penny per transaction. - A typical market maker makes markets in 500+ stocks at any one time. Good luck doing that on your own. - They've invested in being as physically close to the actual exchanges as possible so that they can be first to respond - They're rarely greeks neutral beyond delta - As registered market makers, they have tax advantages you do not

H8crilA 4y ago
Do you think that the (often criticized, perhaps way too much) ability to sell naked short is meaningful too?
- vgt 4y ago
  I've heard this strategy referred to as "picking up pennies in front of a steamroller" - it works until the CEO is discovered to be a fraud, goes to jail, and stock loses 80% of its value in a week. Then you lose everything on a single position. Market makers do this as a free way to cover delta risk in that direction. If you have +100 delta, selling 100 "units" (way out of the money options) is a nice way and doesn't carry any other greeks. I've seen speculators do this, but they're playing with fire. I've seen an investor risk 9 digits to pick up $50k a minute before strike expiration, not realizing that the actual settlement is the next day (so adversarial events can still happen).
  - moneywoes 4y ago
    If the expected value is positive that means in the long run it should be fine right?
    - vgt 4y ago