Options Market Making

The options market is a complex ecosystem. Market makers participate in almost 40 percent of all options trades, and they’re the main source of price discovery and transparency for investors. Options exchanges operate eight auctions for this purpose. Of these, CBOE’s AIM commands 30% of market share, ISE’s PIM accounts for one-third, and PHLX PIXL represents 25 percent. Other exchanges that participate in options auctions include NYSE Arca, AMEX Cube, MIAX Prime, and BOX. Moreover, these auctions are dominated by sell-side firms, and some exchanges even operate their own trading floors.

This book explains the basics of options trading, including how to interact with market makers and how to trade with them. Topics covered in the book include volatility, risk analysis, options trading strategies, and tactics. Chapters cover working with market makers and the role of synthetic options. Many graphs help clarify the concepts presented in the book. It is highly recommended for any investor looking for a more comprehensive understanding of options market making. Further, you will be able to apply these techniques to your own trading.

Lead Market Makers must engage in a course of dealings for their own account, and they must contribute to the price continuity and orderliness of the options market. In addition, they must meet the criteria set forth in paragraphs (c) and (d) of this Rule. As a Lead Market Maker, you must ensure that the transactions that you conduct are fair and orderly, and are reasonable and sufficient to the current needs of the options market.

To remain eligible, options market makers must execute at least 25 percent of all options contracts in a series. If your position exceeds 25 percent, the Market Maker will not execute any additional trades in that options series. As a result, you should be careful to manage your exposure. As with other market-making activities, it’s imperative to ensure that you understand the nuances of the options market and what makes it so unique. So, what do you need to do to earn more and get paid more?

Primary market makers must comply with the rules set forth by the SEC. These rules govern how a primary market maker may quote options. In addition to updating their quotes, a primary market maker must maintain active markets in all options series. They must also honor orders that have been attributed to them and those routed to away markets. If a primary market maker fails to meet the rules, their registration as an options market maker will be terminated and they will not be able to re-register until after the expiration of their contracts.

While options trading is more complex than stock trading, it can yield larger profits in certain circumstances. If the price of a security rises, the options trade will help you protect yourself from a loss by buying or selling a corresponding option. Often, this process is called hedging, and the process is also known as “open interest.”