1. How to Take Money From the Market Maker
Presented by Andrew Keene

2. Disclaimer
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3. Andrew Keene - Floor Trader @ CBOE 10+ Years
Regular Contributor to CNBC & Bloomberg
Taught thousands of students how to become full time traders
Turned $50,000 into millions of dollars

4. Trade Like a Market Maker
-This is the BEST time ever to trade Options: Markets are Tighter, Penny Wide, and More Liquid that Ever -There are 8700 stocks and 4200 stocks with options. -Of the 4200 stocks with options, there are over 320 stocks with listed weekly options Gives traders 52 expirations to trade instead of 12

5. Trade Like a Market Maker
What is a Market Maker? 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 650 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.

6. Trade Like a Market Maker
We will discuss:
Who Controls Order flow
Watching Institutional Order Flow
Use the Market Makers Target for Iron Condors
Learn Best Time of Day and Week to Trade Credit and Debit Spreads
Learn when and why to Trade a Credit or Debit Spread
Learn how to Potentially Profit 600% in Options Using Market Maker Targets

7. Trade Like a Market Maker
Understanding Who Controls Order Flow: Does the market maker control order flow? Absolutely not! Institutional traders and investors are the ones who really control all of the order flow in the options market. But who are these traders?

8. Institutional Paper Mutual Funds, Pension Funds,
Sovereign Wealth Funds
The “whales” are the ones really in control of order flow

9. Institutional Paper Hedge Funds
The more aggressive fish also control order flow. These orders come from hedge funds and big traders.

10. Trade Like a Market Maker
Understanding Who Controls Order Flow:
Why are these the people in control?
They have MORE capital
They have MORE access to information
They have BETTER technology
They can take on MORE risk
These are the traders we want to follow. These are the traders the market maker watches.

11. Using the Scanner in the Trading Room: How will follow and watch Order Flow

12. Using the Scanner in the Trading Room
They talk about unusual options activity all the time on CNBC and other options shows all the time. Why?

13. How We Trade Trading Unusual Options Activity:
We have a scanner that shows us every block trade from every options exchange.
We watch over 2,000 orders hitting the tape everyday and look for the most “unusual” trades
Market makers look at the same things
What do these orders look like?

14. Unusual Option Activity Example
Trade Size
Symbol
Expiration
Implied Vol
@ the Time
Strike
Type
Price Traded
11:20:10   11,500 GERN Oct 2 Puts $.11  ON BID   IV=96.9%    AMEX 311 x $.10 - $.20 x OPENING   GERN= $2.19
Time Stamp
Exchange & Bid Ask
@ the time
Opening or
Closing Position
Where stock was trading
When the option trade
happened
Bought or Sold
*Red Sold Green Bought

15. What Makes the Order Unusual?
Trading Unusual Options Activity:
The block trade is considered “unusual” if the option volume is above the average daily volume over the past 22 days.
Analyzing unusual order flow gives traders a window into what the positions that large institutional players have.
Order flow can however at times be deceiving. One might logically thing that a large block buyer of calls is bullish on the underlying. This is not always the case

16. Using the Scanner in the Trading Room
Trader Buys Calls: Is it a Hedge or Speculation?
Trader Sells Calls: Protection against long stock position or speculation to establish short position.
Trader Buys Puts: Protection against long stock position or speculation to downside?
Trader Sells Put: Protection against stock stock position or speculation to upside?

17. Using the Scanner in the Trading Room
Paper Buys Calls : 60% - 40% Bullish / Bearish
Paper Sells Calls : 50% - 50% Bullish / Bearish
Paper Buys Puts : 65% - 35% Bullish / Bearish
*Paper Sells Puts : 80% - 20% Bullish / Bearish

18. Using the Scanner in the Trading Room
Because order flow can be deceiving market makers look for patterns in the order flow.
On a daily/weekly basis is the order flow more bullish or bearish.
If institutions are consistently buying calls day in and day out it is more likely to be a speculative bet.
We’ve seen this happen in stocks like ECA, VLO, TSO and BWP. Relentless call buyers
Looking where open interest sits can also help make this determination

19. Notice how thin OI is on the Put side
See all of the open interest on the call side?
Take note as well that the OI is in ATM and OTM Options

20. Using the Market Makers Targets for Iron Condors and Iron Butterflies: Using Smarter Targets For Income Strategies

22. Using the Market Makers Targets for Iron Condors and Iron Butterflies
Traders can use the price of the at the money straddle to calculate how much market makers think the stock can move by expiration.
This can be easily calculated using the price of the at the money straddle. Traders can use this to calculate implied closes for that expiration.

23. Using the Market Makers Targets for Iron Condors and Iron Butterflies
The Goldman Sachs Group, Inc (GS) was reporting earnings on 4/17/2014 Before the market open.
I thought that the stock wouldn’t move much so I wanted to set up a short premium position.
Why did I think this?
I looked at the historical performance of GS on earnings.

24. Using the Market Makers Targets for Iron Condors and Iron Butterflies
Date       PreEarn PostEarn     Change 01/16/14  $178.75  $175.17  $-3.58 (-2.0%) 10/17/13  $162.25  $158.32  $-3.93 (-2.4%) 07/16/13  $163.00  $160.24  $-2.76 (-1.7%) 04/16/13  $146.46  $144.10  $-2.36 (-1.6%) 01/16/13  $135.59  $141.09  $+5.50 (4.1%) 10/16/12  $124.50  $123.22  $-1.28 (-1.0%) 07/17/12   $97.68   $97.98  $+0.30 (0.3%) 04/17/12  $117.73  $116.86  $-0.87 (-0.7%) Historical Earnings Move: Mean 1.7%, Median 1.7%

25. Using the Market Makers Targets for Iron Condors and Iron Butterflies
The GS Apr ATM Straddle was trading at $3.70. This tells me that the stock can move up or down by $3.70 BY EXPIRATION. Using this straddle price we will calculate our upside and downside targets: Upside Target = $ $3.70 = $ Downside Target = $ $3.70 = $ I now have an implied range that I can use to set up a trade

26. Using the Market Makers Targets for Iron Condors and Iron Butterflies
Using the Measured Move Targets to Set Up an Iron Butterfly: My Trade: The GS Apr Iron Butterfly for $2.00 Credit Risk: $50 per 1 lot Reward: $200 per 1 lot Breakeven: $ and $ This trade has a GREAT reward/risk set up and has a wide range of profitability. Let’s see how it played out…

29. Using the Market Makers Targets for Iron Condors and Iron Butterflies
The SPY is currently trading around $ I will look at the weekly straddle to get targets.
The Weekly Straddle is trading at $1.30
Upside target = $189.80
Downside Target = $187.20
Now let’s look at a trade set up…

30. Using the Market Makers Targets for Iron Condors and Iron Butterflies
Trade: The SPY Weekly Iron Condor for $0.35 Credit Reward: $35 per 1 lot Risk: $65 per 1 lot Breakeven: $ and $ This trade makes money if the SPY closes anywhere between $ and $ on expiration. This trade also sets up well on a risk vs. reward basis

31. When Is the Best Time to Trade Credit vs. Debit Spreads
When Is the Best Time to Trade Credit vs. Debit Spreads?: Capturing the Most Premium and Avoiding Time Decay

32. When Is the Best Time to Trade Credit vs. Debit Spreads?
When is the best time to buy a car? When you are shopping for a car when is the dealer more incentivized to give you a good deal? At the beginning of the month your less likely to get a good deal. At the end of the month they have quotas to meet. Think about that while we discuss how market makers think about premiums during the week.

33. When Is the Best Time to Trade Credit vs. Debit Spreads?
Market makers know the best time of the day and week to trade credit spreads and debit spreads.
On Thursday morning I will begin selling out some of my long premium positions
Thursday afternoon is when market makers begin “rolling their date forward”
What does this mean?

34. When Is the Best Time to Trade Credit vs. Debit Spreads?
Thursday afternoon is when premium really starts to come out of options but when do I want to
be putting on debit spreads?
I know that I want to be buying debit spreads on Tuesday afternoon
This is the best time of the week for me to put on long premium positions
Why?

35. Why Trade a Credit Spread vs. Debit Spread
Why Trade a Credit Spread vs. Debit Spread?: Know Which Stocks Work Best For Credit vs. Debit Spreads

36. Why Trade a Credit Spread vs. a Debit Spread?
Changes in a stocks trend and price action can change our considerations when looking to trade credit or debit spreads.
Some things to think about:
Is the stock in a range?
Is the stock a trending stock?
Is the stock breaking any key levels?
Lets look at some chart examples….

37. As stock breaks key level here implied volatility explodes
As stock breaks key level here implied volatility explodes. Now we are looking for debit spreads
When inside this range we want to be trading credit spreads

38. This type of trend is very strong
This type of trend is very strong. We want to be trading debit spreads on charts like this.
With stock at $35 I could get long 2 ways:
Buying Front Month Call Spreads for $0.30
Selling the Front Month Put Spreads for $0.30
Which setup had a better return?

39. Using the Market Makers Targets to Potentially Make 600% Profits: Us Smarter Targets to Set Up Low Risk High Reward Strategies

40. Using the Market Makers Targets to Potentially Make 600% Profits
We talked about how we can use the market makers targets to find levels for Iron Butterflies and Iron Condors. We can also use these targets for more speculative trades. We will look at how to use them to set up low risk high reward strategies called Call and Put Butterflies. We trade these strategies ahead of earnings announcements or other catalyst events.

41. Using the Market Makers Targets to Potentially Make 600% Profits
Earnings Trade in SWKS:
SWKS is reporting earnings on 4/22/2014 After the bell:
Stock was trading around $37.00
The Apr 25th 37 Straddle was trading around $4.00
The chart was looking very bullish
We calculate an upside target of $41.00

42. Using the Market Makers Targets to Potentially Make 600% Profits
My Trade: I bought 15 SWKS Apr 25th Weekly Call Butterflies for $0.38 Risk: $38 per 1 lot Reward: $162 per 1 lot Breakeven: $39.38 and $42.62 This trade has a better than 5-1 reward to risk set up but it is typical to see setups with a 6-1 or better setup.

43. Shares of SWKS gap higher right to the measured move target

44. Using the Market Makers Targets to Potentially Make 600% Profits
On Friday I was able to sell my SWKS Call Flys for $1.60 or 500% Profits.
These are huge profits and the reason this trade worked out so well is because I had great targets calculated using the straddle.
This is how market makers develop targets and it works better than anything else out there.

45. Using the Market Makers Targets to Potentially Make 600% Profits
Butterflys to Get Short:
TWTR is reporting earnings on 4/29/2014 After the bell:
Stock was trading around $43.50
The May 2nd ATM Straddle was trading around $6.00
The chart was looking very bearish, broken
We calculate a downside target of $37.50

46. Using the Market Makers Targets to Potentially Make 600% Profits
My Trade: I bought the TWTR Weekly Put Fly for $0.45 Risk: $45 per 1 lot Reward: $255 per 1 lot Breakeven: $39.55 and $34.45 This trade has a better than 5-1 reward to risk set up but it is typical to see setups with a 6-1 or better setup.

47. Confidence Scale
Andrew Keene’s Confidence Scale: How I size trades and Manage Risk 5: Least Confident Trades: Often Weekly Options and Spreads 4: Front Month Positions 3: Positions that are 2-6 Months from Expiration 2: Positions that are 4-8 Months from Expiration 1: Most Confident Trades

48. Summary
Institutional traders are the ones who control the market. These institutions are hedge funds, mutual funds, pension funds and big banks.
Traders can spot trends in the put/call ratio to determine what the overall sentiment of the options market is on a given stock
Market makers targets are far more accurate than price targets developed using fib levels or other technical analysis methods.
Traders can use these targets to trade Iron Condors and Iron Butterflies around catalyst events or for income strategies.
Thursday morning is the best time to sell premium before market makers “roll their date forward”
We only want to trade credit spreads in trading range stocks, if they breakout we become debit spread traders.
We want to trade debit spreads in trending stocks

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