Saturday, August 20
Option Market Making by Allen Jan Baird
This book is written for those who would like to become a market-maker on one of the options exchange.
Baird's focus is on the "...basic risks, strategies, and tactics of options market-making as a profitable business. It's goal is to be both a theoretical and a practical reference for options traders, dealers, and market-makers in financial and commodity options markets..."
Right off the bat you know that this is not a book for beginners or small-time retail options traders. Nor is it a book for the speculator of any size for that matter, though they too would profit from reading it.
His focus is on those people who have to take the other side of whatever order may come into the options trading pit, and how they might capture their profit while still minimizing their risks.
He starts out with a brief discussion of fair value, pricing models, and volatility. Then he quickly moves on to the standard risks of individual options such as delta, gamma, vega, etc., giving good explanations of each.
Next, he talks about those subjects which don't often appear in thin books on options trading: synthetics, conversions and reversals, the importance of interest rates and boxes, time and calendar risks, and finally core strategies and market-making tactics.
Baird does a great job of avoiding the temptation to impress his readers with a lot of formulas and mathematics and instead relies on simple examples and diagrams to get his concepts across.
As I said, this is a thin volume, coming in at under two hundred pages, but it gets right to the heart of the matter. It doesn't take the encyclopedic approach that some fall back on, but gives simple and direct instructions on how to hedge individual trades and what kinds of overall positions you should be shooting for as a market maker.
This is an excellent addition to any library on options trading, as a reference for the speculator, or an instructional guide for the future market maker.
Options Market Making gets the Full Moon rating; excellent.