How to Take Money From the Market Maker

Secrets of a Market Maker
Presented by
Andrew Keene
Andrew Keene
- Took my last $50,000 and turned it into $5.5 Million
- Market Maker @ CBOE 10+ Years
- Have Taught 1000’s of Students to Full Time Traders
- Regular Contributor to CNBC,
CBOE, Bloomberg
Why Best Time Ever to Trade?
This is the BEST time ever to trade Options:
1. Markets are Tighter
2. Penny Wide
3. More Liquid Than Ever
Look at all the Choices?
- There are 8700 stocks and 4200 stocks with options.
- Of the 4200 stocks with options, there are over 320
stocks with listed weekly options
- CBOE lists weekly option on indices, stocks and ETF’s
- CBOE publishes a list of all assets with weekly options
- Gives traders 52 expirations to trade instead of 12
Market Maker Make $$$ on Bid-Offer Spread ?
A market maker is someone who is always quoting a bid-ask spread for
a given option contract. The market maker is willing to take either side
of the trade and is hoping to profit from the spread between the bid
and offer.
Example: AAPL is trading at $530.00
The market maker makes a market for the Dec 550 calls at 25.00-25.30
20 up. This means that at this given time the market maker is willing to
buy 20 contracts at $25 and/or sell 20 contracts at $25.30.
Lets Look at their Profit Margin?
Lets revisit the AAPL example from the earlier slide. In that example the
market maker was quoting a market for the Dec 550 calls of $25-$25.30
20 up.
In theory the market makers goal is to buy those 20 options at $25 from
a trader then sell them to another trader for $25.30. If he can do that
he nets $600 in what could have been seconds.
So the market maker also benefits from wider
markets. It gives him more edge and allows
for greater profit. Think Profit Margin.
Lets figure out how Market Maker Makes $$$
Lets look at another example of a market maker outside
of the options world.
At a currency exchange like you would see in an airport you will always see them
displaying 2 prices for a currency pair. For example you may see EUR/USD at
1.30-1.40. This means that they will BUY EUR from you at a rate of $1.30 per 1
Euro and SELL EUR to you for $1.40 per Euro. They hope to make as many
transactions as possible and profit from this small difference in price.
This is called the bid offer spread.
Market Maker Makes $$$ on Implied Volatility
Think about the market makers inventory like you would a jersey store.
Its all about inventory in and inventory out. The store owner will keep
the store well stocked with the “hot” names. Lebron James is a popular
name and will always sell out. Since these names are more popular the
store owner knows there is a bigger demand for them. He also knows
he needs to be more competitive in his pricing.
The market maker operates the same way. Stocks that are heavily
traded will have a tighter market and more quantity available. AAPL
and FB are the Lebron jerseys of options.
Making $$$ of Decrease in Volatility?
Market makers can make money in more ways than 1. Generally, market
makers profit from changes in implied volatility. They stare at implied
volatility all day long. Market makers try to be “delta neutral” in their
position meaning market direction is not that important to them.
Example: I am a market maker who just sold a trader 20 Facebook (FB)
Apr 70 Calls for $3.00. These calls have a delta of 50 and an implied
volatility of 40.
I immediately buy 1,000 shares of stock against my short calls.
1 week goes by and FB stock has not moved. Implied volatility has
dropped to 35 and the calls I am short are now trading lower. Here I
made money being non directional but short volatility.
Market Maker Makes $$$ on Time Decay
Time Decay:
Think about options like an insurance policy that you buy. You may pay
your car insurance premiums once a month but you are really paying
them a little every day. Options are the same way.
Returning to the previous example the market maker who sold the
trader those APPL calls also profits from time decay.
The option trader who bought those calls paid all of the premium up
front but the options will decay a little everyday. As the market maker is
delta neutral they are profiting on this time decay.
Is it That Easy to Become a Market Maker?
When I got my start on the floor I went through a training program that
could have taken me as long as a year to complete. During that time I
sat in class everyday, took tests once a week, and participated in mock
trading after the close. The point of this training was to learn every
single way a market maker can make money. The secrets of a market
maker so to speak.
Of the 14 of us only 3 got the opportunity to trade on the floor. Since
then markets have changed and being a market maker is not as
profitable. I made the move to retail customer but still use the things I
learned from being a market maker for over a decade.
Market Maker Secret
The Market Maker makes money off you, but you don’t
even realize it.
How do they make money from you:
1. The Bid-Offer Spread
2. Implied Volatility Changes
3. Time Decay
They do NOT run stops though, but its time to FIGHT back
against them and start taking their money.
I am a market maker who sells 20 AAPL Dec 550 Calls for $25.30
while stock is trading at $530. I would then hedge myself with
stock based on the delta of the option. In this case lets say the
delta is 50. I would then buy 1000 shares of stock to hedge my
position and become “delta neutral.” The market maker is
always managing their positions in an effort to remain
delta neutral.
Lets say 1 month goes by and the stock has rallied $5.00 to $535
and the Dec 550 calls are now trading at $27 and examine the
differences in the market maker’s and the trader’s positions.
The market maker isn’t out to get you.
Remember the market maker sold 20 calls at $25.30 and bought 1,000
shares of stock at $530.
The stock has moved up to $535 and the Dec 550 calls are at $27.
The market maker lost $1.70 per contract or $3,400 in total.
They profit on the long stock position by $5 per share or $5,000 total.
The market makers net profit is $1,600.
The trader who bought the calls also profits by $1,700.
So we can see that both parties made money in this transaction.
The market maker isn’t out to get you.
I will Teach you the Ways to Take Money from the Market
Makers like Me, IT’S SIMPLE & PROFITABLE!!!!
How to Take Money From the Market Maker
FREE Advertising, Getting Filled Before the Market Maker Every
Retail customers benefit from something called “customer priority.”
Let’s say that a market maker has a market on XYZ calls of $1.00-$1.30
500 up. I have these calls and want to sell some at $1.30 so I join the
$1.30 offer. Since I am a retail customer my order must be filled before
the market maker.
We call this “Free advertising.” Since I know I will get filled before the
market maker I will always put offers out even if they are off the market.
As soon as I take a new trade I put these offers out.
How to Take Money From the Market Maker
The exchanges have rules in place to entice retail customers to trade
more. Remember that orders are filled as FIFO. Because of this I will
always get filled before the market maker but I can take this concept to
another level.
In the morning I will put out ALL of my offers for positions. This way I
am ahead of the market maker and will get better fills. Most retail traders
don’t do this. This is something that will help you get better fills in the
long run.
Develop targets before you place a trade and put those offers
out every morning.
We Need to Fight Back NOW
Remember that in order for the market maker to keep
making money they need customers. I will teach you the
ways to start taking money back from the market maker.
The market maker isn’t concerned with running your stops
or squeezing you out of a position.
We can beat them at their own tricks and I will teach you
How to Take Money
from the Market Makers
 Understand who controls the Order Flow
 I will teach you the Secrets to getting the CHEAPEST
 Stock losing valuable “Dividend Money” on Calls
 “Gamma Scalp” & Lock in Profits when Markets are Closed
 Spread book Tips for Getting Better Fills
Price Available for First 200 Students Only
Or Call Now: 312-261-5581