Secrets of a Market Maker Presented by Andrew Keene

Andrew Keene - Took my last $50,000 and turned it into $5.5 Million - Market 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 $ The market maker makes a market for the Dec 550 calls at 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 $25-$ 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 $ 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 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. 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.

15 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 Time: Retail customers benefit from something called “customer priority.” Let’s say that a market maker has a market on XYZ calls of $1.00-$ 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.

SPECIAL TOPIC COURSE: How to Take Money from the Market Makers Understand who controls the Order Flow I will teach you the Secrets to getting the CHEAPEST commissions 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: $97