The markets haven't corrected sharply , that doesn't mean that they will only go up and up. If it has to really take off, we will need the legal authority to provide for certain relaxations. Why did Sebi clamp down on brokers dealing in digital gold and what is the way forward?
Once the proposed electronic gold receipts EGR start to trade, brokers would be allowed to deal in them. Sign in Create a Rediffmail account. December 15, IST. Get Rediff News in your Inbox: email. Print this article. SBI Boss: 'Definite improvement in economic activity'. Ain't Pant Cute?
Nifty has a good support from the 15,, band, where it may find durable support, while 16,, could serve as a resistance on the upside, said analysts. Technically, this pattern indicates a display of sharp downside momentum in the market with minor upside recovery," says Nagaraj Shetti, technical research analyst, HDFC Securities.
This is a negative indication and one may expect more weakness in the near term," adds Shetti. He, however, believes there is a possibility of a pull-back from the lower levels and that could lead to a 'sell-on-rise' opportunity.
Sign in Create a Rediffmail account. December 21, IST. These people are willing to trade options for large percentage gains even knowing their entire investment may be on the line. In a sense, taking a position in the market automatically means that you are competing with countless investors from the categories described above.
While that may be true, avoid making direct comparisons when it comes to your trading results. The only person you should compete with is yourself. As long as you are learning, improving, and having fun, it doesn't matter how the rest of the world is doing. Market making Professional traders known in the industry as market makers or market operators , often think that for the beginning investor, option trading must seem similar to putting together a puzzle without the aid of a picture.
You can find the picture if you know where to look. Looking through the eyes of a professional market maker is one of the best ways to learn about trading options under real market conditions.
This experience will help you understand how real-world changes in option pricing variables affect an option's value and the risks associated with that option.
Furthermore, because market makers are essentially responsible for what the option market looks like, you need to be familiar with their role and the strategies that they use in order to a regulate a liquid market and ensure their own profit. We will provide an overview of the practices of market makers and explore their mindset as the architects of the option business. First, we will consider the logistics of a market maker's responsibilities.
How do market makers respond to supply and demand to ensure a liquid market? How do they assess the value of an option based on market conditions and demands?
In the second part of this chapter, we will consider the profit-oriented objectives of a market maker. How is market making like any other business? How does a market maker profit?
What does it mean to hedge a position, and how does a market maker use hedging to minimize risk? Who are market makers? The image of an electronic trading terminal is not unfamiliar to the Indian imagination, but many people might not know who the players behind the screen are. Market makers, brokers, fund managers, retail traders and investors occupy trading terminals across India.
Thousands of trading terminals across cities of India are combined, they represent the marketplace for option trading. The exchange itself provides the location, regulatory body, computer technology, and staff that are necessary to support and monitor trading activity.
Market makers are said to actually make the option market, whereas brokers represent the public orders. In general, market makers might make markets in up 30 or more issues and compete with one another for customer buy and sell orders in those issues.
Market makers trade using either their own capital or trade for a firm that supplies them with capital. The market maker's activity, which takes place increasingly through computer execution, represents the central processing unit of the option industry. If we consider the exchange itself as the backbone of the industry, the action in the Mumbai's broking offices represents the industry's brain and industry, heart.
As both a catalyst for trading and a profiteer in his or her own right, the market maker's role in the industry is well worth closer examination. Individual trader versus market maker The evaluation of an option's worth by individual traders and market makers, respectively, is the foundation of option trading.
Trader and market maker alike buy and sell the products that they foresee as profitable. From this perspective, no difference exists between a market maker and the individual option trader.
More formally, however, the difference between you and the market maker is responsible for creating the option industry, as we know it. Essentially, market makers are professional, large-volume option traders whose own trading serves the public by creating liquidity and depth in the marketplace.
On a daily basis, market makers account for up to half of all option trading volume, and much of this activity is responsible for creating and ensuring a two-sided market made up of the best bids and offers for public customers. A market maker's trading activity takes place under the conditions of a contractual relationship with an exchange.
As members of the exchange, market makers must pay dues and lease or own a seat on the floor in order to trade. More importantly, a market maker's relationship with the exchange requires him or her to trade all of the issues that are assigned to his or her primary pit on the option floor. In return, the market maker is able to occupy a privileged position in the option market - market makers are the merchants in the option industry; they are in a position to create the market bid and ask and then buy on their bid and sell on their offer.
The main difference between a market maker and retail traders is that the market maker's position is primarily dictated by customer order flow. The market maker does not have the luxury of picking and choosing his or her position.
Just like the book makers in Las Vegas casinos who set the odds and then accommodate individual betters who select which side of the bet that they want, a market maker's job is to supply a market in the options, a bid and an offer, and then let the public decide whether to buy or sell at those prices, thereby taking the other side of the bet.
As the official option merchants, market makers are in a position to buy option wholesale and sell them at retail. That said, the two main differences between market makers and other merchants is that market makers commonly sell before they buy, and the value of their inventory fluctuates as the price of stock fluctuates.
As with all merchants, though, a familiarity with the product pays off. The market maker's years of experience with market conditions and trading practices in general - including an array of trading strategies - enables him or her to establish an edge however slight over the market. This edge is the basis for the market maker's potential wealth. Smart trading styles of market operators Throughout the trading day, market makers generally use one of two trading styles: scalping or position trading.
Scalping is a simpler trading style that an ever-diminishing number of traders use. Position trading, which is divided into a number of subcategories, is used by the greatest percentage of all market makers.
As we have discussed, most market maker's position are dictated to them by the public's order flow. Each individual market maker will accumulate and hedge this order flow differently, generally preferring one style of trading over another.
A market maker's trading style might have to do with a belief that one style is more profitable then another or might be because of a trader's general personality and perception of risk. The scalper generally attempts to buy an option on the bid and sell it on the offer or sell on the offer and buy on the bid in an effort to capture the difference without creating an option position. For example, if the market on the Nifty July puts is 15 bid - This trader is now focused on selling these puts for a profit, rather than hedging the options and creating a position.
Due to the lack of commission paid by market makers, this trader can sell the first The trader has just made a profit without creating a position. Sometimes holding and hedging a position is unavoidable, however. Still this style of trading is generally less risky, because the trader will maintain only small positions with little risk. The scalper can make money only when customers are buying and selling options in equal amounts. Because customer order-flow is generally one-sided either customers are just buying or just selling the ability to scalp options is rare.
Scalpers, therefore, are generally found in trading pits trading stocks that have large option order flow. The scalper is a rare breed on the trading floor, and the advent of dual listing and competing exchanges has made scalpers an endangered species. The position trader generally has an option position that is created while accommodating public order flow and hedging the resulting risk.
This type of trading is more risky because the market maker might be assuming directional risk, volatility risk, or interest rate risk, to name a few. Correspondingly, market makers can assume a number of positions relative to these variables.
Generally the two common types of position traders are either backspreaders or frontspreaders. For example, a long straddle would be considered a backspread. In this situation, we purchase the 50 level call and put an ATM strike would be delta neutral. As the underlying asset declines in value, the call will increases in value. In order for the position to profit, the value of the rising option must increase more than the value of the declining option, or the trader must actively trade stock against the position, scalping stock as the deltas change.
The position could also profit from an increase in volatility, which would increase the value of both the call and put. As volatility increases, the trader might sell out the position for a profit or sell options at the higher volatility against the ones she owns.
The position has large or unlimited profit potential and limited risk. As we know from previous chapters, there is a multitude of risks associated with having an inventory of options. Generally, the greatest risk associated with a backspread is time decay. Vega is also an important factor. If volatility decreases dramatically, a backspreader might be forced to close out his position at less than favorable prices and may sustain a large loss. The backspreader is relying on movement in the underlying asset or an increase in volatility.
Using the previous example, the frontspreader would be the seller of the level call and put, short the level straddle. In this situation, the market maker would profit from the position if the underlying asset failed to move outside the premium received for the sale prior to expiration.
The position also could profit from a decrease in volatility, which would decrease the value of both the call and put. As volatility decreases, the trader might buy in the position for a profit or buy options at the lower volatility against the ones he or she is short.
The position has limited profit potential and unlimited risk. When considering these styles of trading, it is important to recognize that a trader can trade the underlying stock to either create profit or manage risk. The backspreader will purchase stock as the stock decreases in value and sell the stock as the stock increase, thereby scalping the stock for a profit.
Scalping the underlying stock, even when the stock is trading within a range less than the premium paid for the position, cannot only pay for the position but can create a profit above the initial investment. Backspreaders are able to do this with minimal risk because their position has positive gamma curvature. This means that as the underlying asset declines in price, the positions will accumulate negative deltas, and the trader might purchase stock against those deltas. As the underlying asset increases in price, the position will accumulate positive deltas, and the trader might sell stock.
Generally, a backspreader will buy and sell stock against his or her delta position to create a positive scalp. Similarly, a frontspreader can use the same technique to manage risk and maintain the profit potential of the position.
A frontspread position will have negative gamma negative curvature. Staying delta neutral can help a frontspreader avoid losses. A diligent frontspreader can descalp scalping for a loss the underlying asset and reduce her profits by only a small margin.
Barring any gap in the underlying asset, disciplined buying and selling of the underlying asset can keep any loss to a minimum. To complicate matters further, a backspreader or frontspreader might initiate a position that has speculative features.
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