So why does gamma get so nutty around expiration?
Let's say you have stock XYZ, right near a strike. Say the strike is 50. Now let's say there is an open interest of 100 calls, equivalent to 10,000 shares. And let's say the trade is "hedged" by both sides.
With the stock around 50, they have a near 50 delta, so the call owner is short 5000 shares, and the call seller owns 5000 shares.
If it is far away from expiration, the gamma in the option is relatively low. So thus as the stock moves away from 50, the call owner can sell some into strength, but relatively little. He gets longer, but not enormously so until the stock really moves. Likewise, the call short gets shorter, but not much shorter. So both sides do little.
But as expiration draws near, the gamma explodes. Particularly if it is near strike. On expiration day itself, the call owner becomes straight long 5000 shares if if closes above 50, and straight short 5000 shares below. The call seller obviously has the reverse situation.
So equilibrium right? I mean if one guy is buying aggressively, the other is selling.
Well, in reality, one side is going to feel more pressure than the other. If XYZ is moving all over the place, the option short will likley be the one scrambling and probably adding buying pressure into strength and selling pressure into weakness, on the margins, while the long can afford to gingerly pick his spots.
Conversely, if the stock is doing little, the long will feel like Mr.Bigglesworth as his time value erodes, and he'll start fading any move in XYZ. The short will then probably go to the bar and spend the decay he is collecting, and bide his time hedging. The clock is in his favor.
So think of all this as "hand". If the option shorts have "hand", expect lots of pins. If the longs have "hand", get ready for the whipsaw.
Some expirations, it's pretty obvious who is in control. August being Exhibit A for a time when option longs were loving life. This one though? Really tough call. Volatility has picked up moderately, but not enough to say longs are raking it in. Anecdotally, it's a bit of a wash.
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Couple options questions.
Do market makers know where orders originated? e.g., Do they know it's a Schwab order vs. Interactive Brokers, etc?
Also, do they have any preference in filling orders from any particular exchange? Is it just based on volume per exchange, or will CBOE orders fill before PSE orders? Is there any benefit to placing an order on a specific exchange?
Thanks.
I'm gone 6 years now, so not sure to what extent the floors know any more what house is behind an order. Generally, the bigger the order, the more likely it is handled by a human, so thus they PROBABLY still know on those (again, not sure of this any more).
I did have preferences where my orders went until recently. The ISE and CBOE gave the quickest and best fills. Now, I don't preference them as much (ir ever), the exchanges are pretty similar.
so, if i'm scalping options on the same stock every day, either side, can the MM "know me" and screw me on higher/lower prices than a big money player would get?
p.s., the french bird is some kinda somethin' else.
it's possible if your orders go to the same spot, he might realize it's the same player. And it's possible (though not likely) he would try to play with your order. Especially if you are doing well with it at his expense.
That being said, if it's a busy product he probably won't realize. And there's no saying the same MM is on the other side of every trade. And finally, most everything is multiply listed, so he doesn't have much flexibility. Once another exchange bids up to your offer, or offers down to your bid, you are owed a fill no matter what he wants to do.
And indeed on the latter part.
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