Monday, September 7, 2009

Re: [TheOptionClub.com] Charles Cottle Presentation

 

On Sun, 6 Sep 2009 20:51:09 -0500, "mcatolico"
<mcatolico@mindspring.com> wrote:

>I didn't hear the presentation but I can maybe add a comment or two that
>might help understand the "market maker mindset." Mr. Cottle comes from a
>floor tradition. Once upon a time - surprisingly not that long ago - market
>makers had to manage their positions using a basic handwritten carding
>technique. With that method everything traded was resolved into a synthetic
>equivalent call or put unit plus or minus stock (or whatever the underlying
>happened to be) and marked on a trading card like so many notches on a
>chalkboard. Perhaps not so surprising is that this is still a very good,
>fundamental way to manage a dynamic position and to recognize where all your
>risk resides in a momentary glance.
>
I think you are saying that an arbitrary position in calls, puts and
the underlying is equivalent to another one with only calls +
underlying or puts + underlying. Yes, but I don't see why it is
necessarily simpler to analyze without the expiration graph than one
with both calls and puts.

>The reason why floor traders decompose positions into flies is that these
>are excellent ways to tell you just about everything you need to know about
>options. If you know how a fly behaves (e.g. how they change based on time
>and/or volatility) and how they are priced relative to each other you can do
>your job as a market maker (i.e. make fair markets without creating
>arbitrage situations or mis-pricings) and you can effectively see ways to
>attack any risk in your current position. further, changes in those
>relative fly prices tells you a great deal about the underlying
>supply/demand characteristics of the market.
>
Just what is the most general statement that can be made about
decomposing an arbitrary options position into flies? I knew that
condors can be broken up that way.

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