Thank you for the answers!

I'll take a stab too.

I think tastyworks is the answer:
https://tastyworks.com/

Read an options book. There are all kinds of strategies that revolve around buying / selling the underlying & buying / selling the option. EG a buy-write.

I can't speak authoritatively to this one, but I can reasonably say that most options trades don't involve exercise.

Prop trading is a broad term in a sense. There are real firms that prop trade. And there are the ones that would hire you. And then there are the ones that would hire you and allow you to work from home. You probably don't want to work for the later.

I'll throw in my answers as well

I've never traded retail but I think IB and tastyworks have the best fee structures outside of robin hood. Be careful with robin hood but if you know what you're doing it could be the best option.

A lot of option pricing theory is based on the assumption that you have no view on how much the stock is worth (this was the discovery that won scholes and merton a nobel prize, the math was already well known for nearly a century). So if you sell an expensive call and buy stock in the right ratio, you win whether the stock goes up or down.

I'll disagree with the other respondents here. For me it's not a big risk because of the capital I have behind me. For retail it can be a big deal because if you get unexpectedly assigned you may now own more stock than $ in your account, and your broker is then free to **** you in 100 different ways.

If there is a dividend upcoming, you may get assigned on short calls.
If there is no dividend before expiry and you are far ITM, you may get assigned on short puts.
In the case of certain names that are heavily shorted, you may be assigned on either calls and puts.

If you think you may be assigned try to close your option position, presumably you have already realized your edge once you're way ITM.

Every firm is out there to make money, so if they think can make money off of you they will hire you, but you'll need to convince them. Thats the hard part.

For top tier firms like mine which primarily hire Math/Physics/CS PHDs, and give an occasional shot at interviews for MFEs, ivy league undergrads and poker players, I assume you're not enough of an obvious generational talent to get special consideration.

For less sophisticated firms that have a couple specialties and take targeted bets to make money, it should be reasonable as long as you can come off as extremely intelligent and hardworking, along with an impressive track record and knowledge base. Would be a long shot for most.

Then there's the bottom tier that is making money off you rather than with you. As long as you provide your own capital and their system can handle it, no reason you shouldn't be able to get into one of those. You better have a ton of faith in yourself.

So short answer: no

A note on the assignments

From browsing the internets people frequently get into all sorts of trouble selling calls in the most exciting name of the day, lately TLRY for instance. Your broker doesn't allow you to short, so you have the clever idea of selling a call.

The next day you find out your option got assigned and you're short stock. But remember your broker already told you no short selling. So your broker puts in a market order to buy back stock pre-market, paying an absurd spread and leaving you with no position and only losses.

How much have algos changed your job in the last year alone?

Could you be more specific? There's hasn't been any drastic changes or revolutions over the past year. I've never traded in a world where algos weren't a big part of the game.

Hi OP,

Thanks for taking the time to do this. Hopefully you're deriving some benefit too, but it's certainly an interesting read. I'm a relative newbie hobby investor, so apologies if my question is massively stupid or obvious in some way.

Are options priced evenly around the firms' best guess at the instruments' actual values or is there a tendency to set prices in such a way that you are effectively paying a higher commission by either going long or short?

For example, I'm looking at some S&P December calls right now. The 3090 can be bought for 1.1 and sold for 0.0. However, the 3130 can also be bought for 1.1 and sold for 0.0. Logically, the real value of the 3130 must be (much) closer to 0.0 than 1.1, making it an absolutely terrible long (or short).

If I now look at the 2900 call, the spread is 14.5 - 15.8. Does this imply that the firm/market believes that the true price is 15.15, or is it likely to be higher or lower?

Good questions these are important things to know!

In tight active markets I’m generally going to be equal on both side of the ‘true value’ (an undefined concept). When you look at those wide markets that aren’t trading often usually the bid will be closer to the value than the offer. Buying a call is just less risky than selling.

The quote prices are rarely where trades actually take place. You should always use limit orders to trade options

Huge thanks for the reply and bonus information about the limit orders! That hadn't even occurred to me, but after a little research I can say I'll definitely give it a go next time.

The only downside is that this has reminded me what a massive trading fish I am! Such fun learning this stuff, though.

Yeah by "by hand" I didn't mean writing tickets. I meant moving vol curves with any less of a developed system than like Timber Hill (formerly...) or DE Shaw. Get a couple buyers of say calls in stock XYZ and I wouldn't want to be a guy alone holding a mouse and trying to figure out how to move ATM vol, call skew, and put skew, on XYZ, and more-, and less-, related stocks, and ETFs.

Care to comment on how you mark skews? Do you use a simple curve-fitting for each side? Or a true model as such?

I also agree that there's no universal answer for how to react to a vol pop. But it also seemed to me that most market makers did fall into one or the other typical pattern. A typical short comment would be "I love my position but I lost X dollars again today. But!"

While I know very little about timber hill's methodology I think its safe to say my system is far more developed (fairly obviously - would love to hear if you know specifics). Don't know much about DE Shaw. There were tons of market makers doing what you say 5-10 years ago, basically the equivalent of bumhunting. As I mentioned earlier the market doesn't give you anything free these days so it's no surprise that those players went out of business.

I played poker in the post BF period and am a MM through the low-vol period. I may be a glutton for punishment.

What exactly is your background? You seem to know a lot about the industry so I'm somewhat surprised you find my role unusual.

Marks are somewhat of a back office role so I don't know a lot about their methodology. I assume they use an extremely flexible curve fitting model, you'd want to stay as model free as possible.

I'd think having a consistent long or short bias would be somewhat silly as a market maker. Your pnl would be mostly driven by the regime rather than your trading skill. The long biased guy would eventually hit a never ending losing streak to decay and get fired. The short biased guy would eventually get run over by a crash and get fired. The number one rule of trading is always survive

Wow. I don't understand how we're so completely talking past each other. I guess I haven't figured out what exactly you're doing.

I was a market maker on the floor of one of the (at the time) 4 US options exchanges for a few years before and after 2000. At the tail end of that time, I also quoted on the (then-new) ICE.

Are you making markets? Do you post quotes in all strikes and expiries for several names? If so, how many?

(On the floor, I would make markets (jointly using the same screens with the whole crowd) in 20 or more names but most of those would be inactive most of the time. 3 or 4 would be very active (YHOO was my best), 5 or 10 would be intermittently active. I was exposed to autoexecution of electronc orders up to maybe 10 lots at a time. Most of my volume was transacted verbally with brokers announcing orders in person. On the ICE I only quoted about 3 names. We were getting our feet wet and trying not to get run over. We used the default, free quoting software. I think it was OM Torq or something like that. But right then I decided to shift areas and have since worked in commodity options. Mostly at banks. Mostly oil and gas. Some power. A little metals and co2.)

So let's say you're posting markets in MSFT. Your computer dings. You got a trade. Let's say you got lifted on the Dec 125 call. What do you do? How do you move your softie vol? Parallel shift? Change your skew shape too? If you change your skew shape, do you move one strike at a time directly? Or do you have some sort of equation or "model" that allows you to change the entire shape over all or several strikes by just changing one or two parameters?

I haven't studied this thread closely and it's been a while. But I'd formed the general iimpression that you were more or less a market maker. I don't understand how a market maker would not know what I mean by moving your skew marks after a trade. Suggesting that this is a back office function comes off as clueless in the extreme. (Unless you're a box trader. Like the Timber Hill floor traders were. Who have their vol curves sent to them by a quant desk that runs the vol curves. And you just read off prices that those guys are making and moving.

But I don;t actually mean to accuse you of being clueless or misrepresenting your position. I think I probably misunderstood and you're not a market maker but in some other options trading role. So now I'm trying to get a more specific sense of what that is.

To put it more succinctly: moving skew is what market making is.

Thoughts on the current correction?

Is there any reason to work with one of these places rather than trading your own account on IB?

I've been reading some about SMB, do you know anything about them? If so, I assume they fall into this bottom tier, yes?

Thanks for the thread BTW. Keeps getting better.

I've never heard of them, but checking on WSO it looks like they make you pay 10k+ for a training program before you start working for them? Sounds very dangerous, as humans our long term results are very sensitive to the information and philosophy we get early in our career, I'd work very hard to make sure my first exposure to trading is quality.

You may be better off trying to trade small on your own to start out. And network like crazy, people who may not hire you may be willing to have a coffee.

Yeah I'm in the same boat. Quite a lot of what ibavly says is just dead wrong. I don't think he's lying either about what he does so I don't know wtf is going on. Maybe he's just an options trader and not a market maker like OP says. Like, these two comments are dead wrong and that's just reading the last page.

Neither of those statements are even disputable

Your downside is capped at your premium with a buy. Your downside is uncapped when you sell. Risk is not clearly defined but it would take some serious intellectual acrobatics to argue with that.

Unless you're trading tiny $ market orders are pointless. If you want to cross use a marketable limit order. Zero advantage to market orders.

I don't think there's anything I know that can add value relative to the macro guys. If you're asking if we're heading for some crash or if this is a btfd opportunity idk.

As a trader volatility is always welcome, there has been a ton of great trading lately. I guess nobody cares about btc anymore so equities are getting attention again

To me this is the equivalent of saying that calculating pot odds is what playing poker is all about.

In the early 2000s I'm sure lots of poker players made their livings knowing to call the flush draw at 5:1 but not 3:1. But while pros now can do it if needed, thats not really something they spend a ton of effort thinking about or reacting to. It's just not all that important in a world with wide board coverage and mixed strategies.

I'll respond to your big post later.

ibavly, I have a couple of questions for you if you would. I assume that some markets are so small that market makers cover more than one market/?/ But other markets are so large that more than one market maker focuses on the same market/?/ How many market makers cover AAPL options/?/ Would strikes be divided amongst different inviduals / entities, expirations/?/ Im curious about the mechanics of how this works.

Also, could you speak a little bit about gaps? I think the traditional idea behind a gap is that something has changed since the market was last open: say NQZ18 rallies Sunday night so market makers open AAPL up a point Monday morning because they feel that otherwise they will have to sell their inventory at "too low of a price" to make the market. So they more or less open want to open the market at a price that they are indifferent to buying or selling?

Is it ever the case (if it is, I imagine more frequently it would be in the less significant markets) where market makers actually want to accumulate inventory and they open the market down so that they can accumulate inventory?

Also, could you talk a little bit about the float, inventory and shares outstanding? Like maybe define the terms and their relationships?

Thanks for the AMA.

-------------------
I asked a lot of questions. I tried to bold my real questions, the others /?/ are things that are unclear to me that I was asking in support of asking my actual questions. Thanks again!

Just wanted to say, at least for options, the more you trade, the less you will place market orders.

For some markets, like futures or equities it does't really matter if your size is not stupid large. But options and FX are another story.

Most brokers will treat a market order just as it is and if you want to buy you are paying the ask. Conversley, you can place a limit at the ask and get a better fill if they can do it.

OK after reading this I think I understand why we are talking about different things

I have to confess that I can't really know what the experience was being a floor market maker. If you did an AMA I would have a lot of questions. I'm sure things were very different from then to now.

Yes I fulfill quoting obligations by streaming two sided quotes for x% of strikes for y% of the day where those are numbers close to 100. The exchanges and names that I quote are entirely up to me but include the majority of the absurd number of exchanges and at the moment somewhere above 200 names.

I think this is the first language difference that had us talking past each other. If I use the word 'skew', I would be talking about a statistical concept. What you are talking about is what I would call the 'vol skew', most often as used in the local volatility adaptation of the BS option pricing model. It's something that is now ubiquitous in the language of options as it a better representation of the levels you're trading than a $ amount, but it's simply one somewhat simple pricing model.

This would be the other language difference. I still don't know what you mean when you say marks. To me a 'mark' is the option price used in attributing pnl to open positions. If I was able to set marks I'd be able to do shady things like smooth my pnl distribution. Care to elaborate?
[/QUOTE]

good questions rand

I don't have exact numbers, but I'd guess that in most illiquid names there are at least 3-4 allocated market makers. In highly liquid names such as SPY there are a huge number of market makers. There are different types of market makers but in general all allocated market makers need to quote almost all the series throughout almost all the day.

I think maybe the main point here is that market makers are inherently competing with one another (as a former husng reg, that competition to provide liquidity is shockingly similar). If there was only a single market maker, they could conceivably quote unrealistically wide markets to collect off the occasional fish, and they wouldn't really be supporting an orderly market. By competing everyone wants to have the tightest spreads and the largest quotes to get the largest piece of the pie.

I think they found that until the past decade there was heavy collusion between market makers. To the point where if a market maker was tightening markets he might get angry phone calls from other MMs to cut it out. That doesn't happen anymore with very sharp regulatory scrutiny. I'm not sure I'm even allowed to make friends with other MMs I might meet

I don't totally get this question, rather than have me ramble could you explain? This is possibly more asking about a stock MM?
As I mentioned, MMs are all competing against each other. You can set your market to have a low bid to accumulate inventory, but then most likely another MM will outbid you and you will never trade. I think you might be thinking that MMs get to dictate the market, but in effect we are like any other traders just with certain responsibilities that disadvantage us offset by certain speed/information advantages.

Same as above, I think you might be thinking of me as a stock MM. Options derive their value from the underlying stock but are not limited by the float. Any two people can agree to buy+write an option, and the corporation has no say.

Thanks for the reply. I appreciate the thread. Sorry to be slow to reply myself, but like being older now, attention spread thin, obligations, etc etc.

I'll ask some more questions just thrown out randomly to try to get an idea of what you're doing, and I'll make some random comments about things I do or have done, to try to compare.

When you are posting bid-asks ("markets") on screen, live on an exchange, are those bid and ask prices driven by implied vols that you set? Setting/ picking an implied vol, which then determines a price (which then gets fed to a live market) is what I mean by marking vols.

(I understand your comment that "marks" are back office problem, and I was probably too flippant in my response. I know back office / your clearing firm marks your position (and determines your capital requirement etc). But the marks come off the exchange. And if you are posting to the exchange--then you are making the marks. The market makers make the markets and the marks (mmmmm).

That's true for exchange based market makers, which is what I assume your area mainly is. For market makers who trade illiquid products, mostly bilaterally, like at banks, they also typically mark their own positions in a more direct way. Because there is little visibility in the market, there is not a good trove of observable quotes and implied vols from those quotes. Therefore the market maker has to maintain vol marks for every strike by their own system or guesswork. And their own personal/private marks (implied vols by strike) are used by their employer (investment bank) to mark and calc pnl on their positions. (Obviously it's ripe for abuse for traders to get to control the marks to value their own pnl (which drives their bonus). So banks have systems to anonymously compare trader vol marks with each other (Indeendent Price Verification, IPV (see Markit Partners).)

Not trying to have any coherence in these comments, let me back up a bit. Here are a few simplified examples of ways to make markets. I'm trying to compare my experience and yours with regard to which examples we are close to:

In the 70s (I was told) the markets were bids and asks written on chalkboards.. When the underlying moved, you had to manually revise the bids and asks. You might have had a computer, or a formula in your brain to (delta) adjust your options bids and asks as the underlying moved. But publicly, all there were were prices (not vols).

Once there were computers for the exchanges to run, you could put your implied vols in the computers that had options models running. When the underlying moved, you didn't necessarily have to do anything. The new underlying price feeds into the computer and options model. And your quotes updated dynamically. You didn't have to manually change your option prices as the underlying moved. BUT, every option, every strike, every put, had its own vol. And those vols varied from strike to strike. If you needed to respond to market demand, you could announce "add 2 vols to every strike". But if you needed to do something more complicated, like lower calls and raise puts, you had to go strike by stirke, one at a time. Raise this one 2. The next one 1.8. The next one 1.6. On the other end lower that one 3. The next one 2.6.

When market making went screen based, each trader had their own computer, as opposed to sharing one single computer for each exchange's entire crowd. So each trader set/marked their implied vols by themselves. And there were more programs and more theories and more systems for marking implied vols. If order flow is buying small delta options on both wings (eg when a court case is coming out), you might want to move all vols up on every strike. And then move the wings vols up even more. You could do this by adjusting each strike one at a time. Or maybe you have some system for moving several strikes of your implied vols at the same time.

Here are two examples. If you want to move all options up, and move small delta calls and puts up extra, you could have a skewness-kurtosis model. In which you can increase your kurtosis parameter. with this single number increased, you would raise small delta calls and small delta puts higher relative to at the money strikes' vols, with a single input. In a skewness-kurtosis model, all you have to move to shift and reshape the vols for every strike (for a given expiry) are: at the money base vol and skewness and kurtosis.

Another way to market multiple strikes at the same time with only a few parameters that I have seen is to have a system of: at the money vol, plus a parabola formula for call skew and another parabola formula for put skew, with both parabolas joined at the at the money point. If you want to raise the wings, you can raise the slopes, and if you wan to really raise them more than at the money, you can raise the (2nd order) slope parameters.

But regardless of all that, this is what I was trying to ask about: if you are posting bids and asks for several strikes at the same time: you are probably not typing literal prices in for your quotes for every bid and every ask on every strike. You are probably using implied vols, so the options can float with the underlying's movement. And if different strikes have different implied vols (they always do), what I'm asking is whether you directly adjust each vol for each strike. Or do you use some system (I know a few, there are other), for moving vols on several strikes via a few parameters, when you have to/decide to adjust your vols.

Now it may also be the case that you don't run vols for your quotes, strike by strike, in a system or otherwise. It is also possible that you just look at the bid and ask prices out there (and their implied vols, indirectly) and decide that you will simply join/follow the bid and the ask. Or just the bid or just the ask. Or join one and be a tick better or a tick worse on the other. I know it can't be quite that simple. But that's what I meant by "riding the NBBO' in my first comment.

But hte problem that I find interesting, and challenging, is that when you have to adjust prices/vols in response to order flow, and you have to do something more complicated than "add 2 vols to every strike", then 1. it is hard as a practical matter to make different changes more or less on every strike (and some system might be (somewhat) helpful) and 2. it may be hard to do this shaped vol adjustment in a way that is theoretically defensible and not subject to arbitrage.

Some people are out there deciding how to move calls and puts up but move the small delta optoins up an extra amount. Or move calls up and puts down. Or vice versa. And doing that in a systematic way is an interesting and challenging problem. Some people are driving the exchange marks with their skew marking systems. Some make markets in equities off the screens. They make markets for brokers who are connected and shop large volume (10k to 100k up markets) orders. They may markets that cross the screen market bid-asks. But they better have an idea which way they should deviate their skews. Also in that situation of having to maintain vol curves/skews off the screens are structured product traders at banks. And bank sell-side traders in less liquid, off-exchange markets.