| It would be nice to hear from him how often he executed "inside" NBBO. That's easier to do in spread trades than in simple puts and calls. Also note, he said he was acting as a MARKET MAKER. E.g. let's look at where a particular AAPL option closed on Friday: AAPL131221C00550000 9.65 bid 9.85 ask Another, bigger difference because it's further in the money: AAPL131221C00500000 54.15 bid 55.20 ask Another, bigger difference because it's further out in time: AAPL150117C00550000 bid 65.50 ask 66.40 The market maker buys at bid, sells at ask. If he can do that thousands of times a day in a thousand different securities, the profits start to add up. Doing this in options means the market maker needs to be quite nimble, even more than with stocks. This is because he's buying or selling a DERIVATIVE and the UNDERLYING security can change in price quite quickly. But that's why these guys buy fast computers and why they pay smart people the big bucks to write software for those computers (and to e.g. program FPGAs for high speed trading). |
It's not as easy to make money being a options marketmaker because you have to realize not all of your trades will be someone taking your bid/ask. Even so, you'll have delta-hedge your position with the underlying which is a imperfect hedge that is subject to jump risk. Typically a AAPL options marketmaker is taking orders from traders and has up to couple hundred of these AAPL with long name positions, and they have to balance out the greeks, delta and gamma. They may even have to buy some options themselves to hedge themselves and pay the market price.