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American Capital Agency Corp. Message Board

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  • mrwizard9090 mrwizard9090 Dec 13, 2012 2:42 PM Flag

    MM's are getting nervous

    while i am not an options maven, and know just enough to stay away from all but the most obvious plays, i am somewhat of a market maker maven. in theory, and this time might just be a contrary time, MM's make their money on the spread between bid and ask, and therefore adjust their posted B and A to get equal action from the buy and sell sides. just like a bookie, in fact, who adjusts the odds/point spread so that the losers pay the winners and the book. the ideal position for a MM at the close is nothing in the book, or at most, enough to get through the open. but that risks overnight news.

    a MM does not want to be the bag holder. no crystal balls for them either.

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    • Hi Mr Wizard,

      Whwn the MM prices the Puts they include the dividend in the ATM and higher Puts for those contract months which are in the future, which will contain X number of dividends. The MM's are thinking(IMO) a 1.00 dividend going forward, so 15Jan 32Puts are priced at 10.50 because they contain 9 dividends(1.00 x 9) + 1.50(difference in today's PPS and 32.00).

      Now, my original post meant that when the MM's sell that 15Jan32PUT @ 10.50 to the Long Put holder, they simultaneously short the corresponding number of shares @ market to hedge their position. They have to pay the dividend on their short share hedge and that is why they increase the price of the Puts(to the Long Put purchaser), in order to cover that cost.

      Likewise, when I short that Put, they buy the corresponding number of shares to hedge my short position. EX gets placed after the OPEX and the 32Puts lose 1.25 in value. The MM paid 1.25 more than he had to and he has no value in the Long shares to get it back. IOW, if he thought the EX would be after OPEX he would have paid 1.25 less for the Puts. Now he does not get the 1.25 dividend on the expiring option he bought from me, because the options expire before EX. He is SOL and out the dividend for Dec that was originally in the Put he bought from me.

      That is a long explanation and I was waiting for the person(you...;-)) to ask how the MM's get raked over, when they have bet already on the EX being pre OPEX, and then the EX is placed post OPEX.



      Sentiment: Strong Buy

    • I just rolled my long DEC 28 puts to 29 for .09, so now I have 29/30 put spread. Paying 9 cents seemed like a good deal to get a dollar's worth of protection. I will sleep better.

21.92-0.09(-0.41%)Dec 17 4:00 PMEST

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