Option Market Making: Trading and Risk Analysis for the Financial and Commodity Option Markets (Wiley Finance) [Hardcover]

Allen Jan Baird (Author)

Book Description

Series: Wiley Finance | Publication Date: October 16, 1992

Approaches trading from the viewpoint of market makers and the part they play in pricing, valuing and placing positions. Covers option volatility and pricing, risk analysis, spreads, strategies and tactics for the options trader, focusing on how to work successfully with market makers. Features a special section on synthetic options and the role of synthetic options market making (a role of increasing importance on the trading floor). Contains numerous graphs, charts and tables.

Editorial Reviews

From the Publisher

Approaches trading from the viewpoint of market makers and the part they play in pricing, valuing and placing positions. Covers option volatility and pricing, risk analysis, spreads, strategies and tactics for the options trader, focusing on how to work successfully with market makers. Features a special section on synthetic options and the role of synthetic options market making (a role of increasing importance on the trading floor). Contains numerous graphs, charts and tables.

Product Details

• Hardcover: 224 pages
• Publisher: Wiley; 1 edition (October 16, 1992)
• Language: English
• ISBN-10: 0471578320
• ISBN-13: 978-0471578321
• Product Dimensions: 9.3 x 6.4 x 0.8 inches
• Shipping Weight: 1 pounds (View shipping rates and policies)
• Average Customer Review: 3.7 out of 5 stars  See all reviews (10 customer reviews)
• Amazon Best Sellers Rank: #458,066 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

19 of 19 people found the following review helpful:

4.0 out of 5 stars Excellent read for the high-level ops trader, October 5, 1999

By A Customer

This review is from: Option Market Making: Trading and Risk Analysis for the Financial and Commodity Option Markets (Wiley Finance) (Hardcover)

Not for the speculative trader. Baird explains neutrality and hedging scenarios in great detail. Explains some esoteric concepts rarely discussed, such as time spread risk and delta drift. Very succinct explanation on arb spreads and combos, and the tendency to trade to the pin at expiration. Highly recommended.

25 of 27 people found the following review helpful:

5.0 out of 5 stars Classic and essential, this and Hull are mandatory, November 15, 2005

By 

Bachelier ""1004"" (Ile de France) - See all my reviews

Amazon Verified Purchase

This review is from: Option Market Making: Trading and Risk Analysis for the Financial and Commodity Option Markets (Wiley Finance) (Hardcover)

Baird's "Option Market Making" is the *other* essential options book that any serious practitioner should read. Whether you are buy-side or sell-side, or trading your own book, this work is fundamental and extends where Hull leaves off. In short, pricing models do not a bid-offer spread make, and Baird illuminates this dark world with the well-crafted sunshine of expertise, mathematical rigor, and experience. In addition, Baird's prose is clean, clear, readable and lean, without glossing over tough spots or ignoring extremes.

Baird's 1993 "Option Market Making" while a bit dated, is becoming recognized as an enduring classic. Not because it is up-to-date with the latest smile dynamics from the research of Avellenada or Rebenato, but because it does what it does very well. Like a classic cookbook such as The Joy of Cooking, this work tells you how to make perfect pot roast, but not the latest slow braised chipolte-rubbed hand-aged hanger steak.

Baird's "Option Market Making", indeed, is an economic anomaly, for it refutes an old chestnut: "those who can't do, teach." In the financial publishing world a book that makes or saves you money should not exist, since the expected return of taking the time and work for authorship is much lower than another economic activity (probably including flipping hamburgers). What motivated Baird? Who knows? But this is pure saved gold here.

Option neophytes should not be misled: this is not a book of "secrets of" that will lead you to quick easy riches in the sometimes wild swings of delta and gamma in options markets. Rather, this is a sober, careful, useful book on the actual difficulty of making a market under uncertainty and rapidly changing information sets. This is a work for practitioners and professionals who want to survive and thrive, not "*just*drive!*" Cowboys and "feelings" punters look elsewhere to scratch your itch.

Standout chapters include "Options Risk" which treats delta, gamma, lambda, theta, kappa/vega, rho, skew, and time spread risks in a clear, although direct and quick, manner. "Position Risk Profiles" covers the meat and potatoes of an options market maker: what is in your book at any one time. This chapter mercifully is not in a "panic mode" tone, but rather carefully and soberly guides you through essentials of risk determination for your entire book.

The chapter "On Strategy" will be helpful for punters and those who have committed some capital to being a market maker, covering delta neutrality (yawn!), but more importantly time spreading, expiration, Fences, and high volatility periods (yeah!). It also treats broker order flow and open interest analysis in a sober way ("saucer bottom" and "reverse hook" technical analysis copter beanies need not apply).

The chapter "Market Making Tactics" is perhaps the most aggressive, but it also patiently spells out what option market makers do on a daily basis. The entry on "common mistakes" alone is worth the price of this volume. Baird closes with a lighter "Observations from the Floor," which it behooves all to read nd revist upon occasion. Having worked in a pit myself, all I can say is "amen Brother, and again I say amen."

13 of 13 people found the following review helpful:

5.0 out of 5 stars Excellent work, August 21, 2000

By 

Z. Johnson (Kopavogur, Kopavogur Iceland) - See all my reviews

This review is from: Option Market Making: Trading and Risk Analysis for the Financial and Commodity Option Markets (Wiley Finance) (Hardcover)

Although this book is not for beginners, it doesn't contain any formulas. Instead it focuses on all the complex aspects of making a market for options. I've read this book over and over again on a regular interval to remind me on the way market makers do their practice, and how to avoid the pitfalls in trading against specialists.