Keene on the Market: Trade to Win Using Unusual Options Activity, Volatility, and Earnings

CHAPTER 4

Who the Players Are

Market Makers

There are various players in the options trading world. The first group of players are the floor traders, the market makers or locals. These are the men and women who are in the pits of the exchanges, and are often what people think of when they hear about “options traders.” I got my start trading options on the floor of the exchanges at the CBOE, in the GE pit, and then moving on to the MO pit and finally to the AAPL pit. During my first six months on the trading floor I would go home practically in tears because the three big traders would stand in the front of the pit and stare at me any time I made a market on a trade. Once I got quicker and smarter and became a force to be reckoned with, these traders started to respect me. The way it works is once a trader or market maker moves into a pit for a main product he or she can then trade all the stocks that are traded in that specific pit. So, even though I was in the AAPL pit, I had a book of around 125 different stocks. Within a pit there are two types of traders: the market makers and the DPMs.

■ DPMs

DPM stands for designated primary market maker. The pits at the CBOE were owned by a few big trading firms. When I first started trading, Botta Capital Management owned three trading pits. A DPM is obligated to make markets in all equity options products in the pit, but he or she automatically receives at least 30 percent of all the paper traded. DPMs are biggest traders in the pit even ...