BY MARK SEBASTIAN 

March 16, 2024 

As a Market Maker, there are things you don’t want to see and one of them was this…

Let’s take a walk back in time to a land far, far away.  Before I was a boring old Mainer that never leaves the house, I was a floor trader and member of the Cboe and P-Coast for 15 years in the 90s to the mid 2000s.  My first weeks trading were in Gulf War I in 1991.  Back then the Dow was 1700, yes 1700, and my floor time total was two years to that point as a clerk.  That was a big event, and the Dow moved 100 points in 1 day!  The P-Coast floor traded over 150,000 contracts.  Those were massive numbers 33 years ago!   Now that volume is just a strike for 0DTE in SPX.

The next day I noticed a floor manager from a clearing firm come down and pull a member aside.  It seems he was too short going into the GW1 invasion and he blew out.  He got “the tap” on his shoulder.  His account was out of dough and he could not meet margin requirements.  The clearing firm manager quietly pulled him aside and out of the pit.  His trading was over until he could find new capital.  I saw this happen many times over the years, mostly to premium sellers.  

When premium selling times were good, traders used to rip the buy sides off of their tickets, the black and brown side for buying calls and puts as opposed to the red and blue sides for selling calls and puts.  It is funny. I wish I would have saved a few of them since no one uses them anymore.  I tried like heck to find a picture on internet but to no avail

That brings me to the current situation and how it was very much like the Dot Com boom in the 1990s.  The premium sellers were out in force on the floor and it was easy to sell options.  I can remember clearly I would go days without buying any contracts in certain stocks, like AtHome Excite.  Remember that one from the early internet days?  The public could not get enough of the internet boom and bought options at any price.  Sound familiar?

I was trading in a small but lucrative post on the P-coast and I argued with the Designated Primary Market Maker (DPM) all day, every day to raise volatility and option prices.  DPMs were tasked with managing the order flow and volatility in a post. He would not do it and I could see that the orderflow buying contracts was endless.  I spent most days buying options on other floors just to keep ahead.  That trading ended up pushing volatility higher buying options in other places until my post was the lowest price.  I would not sell any and told the DPM that.  He was a stubborn old guy with a lot of experience but this Dot Com Boom  was like no other rally before or since.  I left the post to find another place to trade, as I was done with just treading water.

6 months later the DPM of my old post got “the tap” as one of the stocks he traded went up $200 in a few weeks.  I went on to have my best year trading ever.  The volatilities in options we see now are because of the Dot Com era.  All the folks running firms now are veterans from 25 years ago.  Traders I knew as students are running firms now and it is hard to forget those lessons. 

Is the boom we are seeing in certain stocks unique?  In a way yes since the future market is so potentially large, kind of like the internet.  From an option pricing point of view, it is not.  Remember to go with the flow and when your opinion is wrong, change it, or you will find yourself getting “the tap”.