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What's popping, oh, my god, i almost fell off my chair. Jesus holy toledo welcome to freaking trees, tutors baby. This is going to be a a series essentially on options, markets and options. You know market makers, i'm gon na walk through a couple video segment here.

Talking about market makers, i want to talk about hedging. I want to talk about unhedging gamma, squeezing just to fully walk everybody through this process, so that it's completely comprehensible at a basic level. We're gon na break down each individual segment into a different video. This piece is gon na, be focused on the options, market makers and how that whole process works.

So you can have an understanding, essentially how the market works. You know i make this video primarily for amc. This applies to everything right. The only reason i'm making this now is because there's a high demand for this education.

I think it's important stuff to know so without further ado. What is up everybody welcome to tracerates read. We can talk fast and don't skip class baby by saying that i'm gon na find you buzzing our experts, don't take whatever say they're great, let's get into the video, so i've got kind of a four step process mapped out here, one two, three four they're, all Color coded to keep it nice and simple, a couple of terms that you're gon na need to know right hedging. What does this essentially mean? Well, hedging is essentially managing risk.

When you hear about you know, maybe institutions, hedging against their bet means maybe you're long on a stock. You know five million dollars and you, hedge against, that bet hedging, meaning essentially managing risk and exposure by having a backup plan by playing puts for the downsides. You can make back some of the losses on the long position if it weren't to pan out that's hedging right. It's managing risk, important thing to know.

Derivatives apply to the the options market right, so an option is a form of derivative. That's an important thing to know: liquidity is just cash on hand right how much liquid capital do you have in any given moment in time, so you can manage essentially the entire. You know freaking financial body, that the market makers do so that's an important thing to talk about so we're gon na start off here with the actual options market makers. Now, what do they do? These guys, essentially write up contracts, calls puts, selling calls selling puts whatever it may be.

There's a whole bunch of different variety of things to keep this nice and simple. We're gon na talk about buying calls and buying puts right. Market makers are in charge of this entire process. They write up the entire options: market, the derivatives market for institutions, retail investors and even the market makers to buy and sell from right.

So this whole process, let's say just use, amc as an example right. You look at the options chain. You can see that there's strike prices between half a dollar all the way up to 145. The actual options market is dependent on demand and what the market makers essentially deem as necessary.

Given the current market conditions and given the demand of that given derivatives market, the options market right, amc recently went up 145. This happened because the options on this trade extremely high. It takes up a large amount of the actual derivatives market in the u.s stock market. Right, they're in charge of that entire process.

So to let you know that market makers options, market makers right up the options market right? How does this actually feed into the entire supply and demand right? The buyers and the sellers now buyers and sellers can be a bunch of different people can be retail investors. It can be institutional investors, apes, the suits, whoever may be right, there's people that'll buy from the options market, but first the actual market makers. Once they write. These contracts have to put them on the market now, once these are on the market, it's free chicken for anybody right, including the actual market makers.

Now we're gon na get that here in just a second, but buyers and sellers will come into this options. Market and essentially have transactions, every transaction has a buyer and a seller, the majority of the time it's going to be institutions and retail investors right, but it also includes market makers. Now, let's just use an example right looking at if you were to buy a call, you've got a buyer of a call. Maybe you've got a seller that wants to sell that call right, they're up a significant amount of money.

Maybe they just don't want to take on that risk anymore. You've got an out the money call. You know, for example, if you're gon na look at you know, i don't know 60 bucks today. If you were to play 60 bucks all of a sudden, it's 36 56.

- this guy says i don't want to touch this risk anymore. He sells it and you've got another trader out here who wants to buy that that 60 call, even though it's trading at you know, 56 bucks, that's the transaction that takes place right. These are buyers and sellers they feed into the actual options market. Every buyer is a seller, every seller has a buyer, but sometimes there's not an actual buyer and seller that wants to trade hands right.

Sometimes it's the opposite, and you need to speed up that transaction process, which is where the market makers come into the the equation. They can actually buy and sell, calls and puts as well. They have their own market maker portfolio to speed up transactions. Now you might be thinking to yourself that sounds oddly familiar.

That sounds oddly familiar faster transactions. This is the best the market's ever been they're. Talking about just plain securities right underlying stock - i'm gon na come back to that, but they actually have their own portfolio to help speed up transactions. Because if market makers didn't have this right, you wouldn't have as fast as transactions.

Sometimes you would be able to sell calls, sometimes you would be able to sell, puts, buy calls buy, puts both directions right. Market makers help speed up that process and allow for more overall transactions right. So now that you know that there's buyers and sellers institutions and retail investors, as well as the actual market makers who make up this actual options market, sounds like a freaking vested interest. But what do i know? That's not important.

Right, they've got their own portfolio. They manage that stuff. Let's talk about how things actually pan out right so now that you know buyers and sellers all these transactions take place in the options market. You've got this fourth step, which is, if calls are exercised, and i want to talk about calls specifically right.

So what happens? Market makers are in charge of making sure essentially says they wrote the contract. There's a contract that says: hey, i'm going to pay you this premium, so that you, you know eventually, if i decide to exercise, deliver the stock for this underlying option that i decided to buy right. Market makers have to make that happen. They collect premium, which is how they actually make profit right.

I'm going to show you this right here. Profit comes from the premium that you get on these options contracts. If you look at this overall, you know options chain right here you can see. The premium is actually showed at the ask price right.

So if this ever ends up loading 80 cents would have been the premium per share which comes out to eighty dollars. Since there's a hundred con shares per contract that come out to 80 bucks per contract right, they make their money off the premium. So since there's a contract, saying okay, i will collect this money to deliver you, this contract they're, also in charge of if they decide to exercise they keep that premium and have to deliver stock. Where do the market makers get this stock from they get it from the market they buy and sell from the market and fun fact the buying and selling goes into their portfolio right, their market maker portfolio.

They will do what's called hedging now. Hedging is important because this is a you know, term that we talked about here just a little bit ago. Hedging essentially affects the actual market price. It drives price up and it can drive price down through either hedging or unhedging.

It happens in both directions right. So you know call options start running in the money. You've got out the money, calls that start running in the money, and these market makers will hedge for those calls right and essentially just keep this in their portfolio until buyers decide not sellers, because sellers won't have those contracts anymore right. The buyers would because they decided to hold it and not sell it.

They decided to exercise it. They have to deliver that stock. What happens if they don't actually have that stock right? What happens? Well, they will deliver something called an ftd, a failure to deliver. Now this is essentially an iou, it's synthetic, it does not exist, and this will happen if there's really high demand, but not a lot of supply, meaning the market makers might not actually have the underlying stock in their portfolio and the actual market does not have the Supply to buy those actual shares to deliver on call options that end up getting exercise because they expired in the money right.

You either a deliver stock or bftds. So now you kind of understand this entire process. Really, you know, i think, simplified in a good way. There's other pieces of this that you know i could throw in here, but this is the basics of how it works.

So you understand how you know: market makers make the actual options market. I kind of want to give you some some points that come into this. Both good and bad for market makers that run this options market, you got faster transaction speeds right. This happens because they have their own market maker portfolio, which allows, when there's not a buyer, to sell on the institution or the ape side right to pull from their portfolio and deliver essentially transact between a buyer and a seller right it also.

Could you know it? Can lead to higher percentage of naked contracts, meaning if market makers don't actually have the underlying contract and they can't get it from somebody, they can write up a naked contract, one that should not exist because either a they don't have the stock available. They don't think they're gon na be able to get it or b. They don't have the liquidity available right. The the liquidity right, there's a liquidity piece of this collateral piece of this, which is where robinhood ran into issues.

They didn't have the liquidity to be able to deliver, which is why they supposedly took away the buy button right. Naked contracts can 100 go up, but it's a way to leverage money for both institutions and retail calls and puts in both directions results in more ftds - and i say this - you know this is an important piece paper versus e-trading right, because this faster transaction time i Said i was going to come back to this, and here we are faster transaction times, leads to more ability for corruption, fraudulence and manipulation, bad practice right, which leads to failure to delivers it's 100. True. You've got the most availability in the world right now to be able to buy and sell in instance right.

You can do it on your phone in the blink of a freaking eye, but this leads to more situations for computers and people to make bad decisions to either a give out something they don't have or b deliver something saying they're going to give something back. In return when they can't actually do that and that's a failure to deliver it's an iou stating hey look, i don't currently have the stock for this underlying exercise. Call option. So i'm going to deliver you in iou.

Sometimes i deliver on the stock. Video destroy the ious; sometimes they don't right. It happens in both directions. You can see how it's not just institutions and hedgies that are really doing some damage here.

It's a systemic issue. It's a problem! It's bad right! There's, good things about the options market. Don't get me wrong, it's a great tool to make money if you understand it to a t, but there is some issues with it, and i think this is one of them: is failure to delivers and naked contracts right, computers versus people. This is a piece that i added in here, because this works both ways, so market makers can actually use algorithms to hedge for call options when it runs in the money or out the money, both directions, hedge or unhedged, meaning a hedge - is a buy.

You buy. You know stock underlying stock from the market in order to have that stock available to deliver on call options. If they run in the money and get exercise, you can unhedge the exact same weight, and i'm gon na actually make videos talking about this in more detail. So it's very easy to digest, but that you know that's the exact opposite thing: unhedging means that the stock that was in the money is now out the money and they sell that stock back in the market.

They don't keep it in their portfolio anymore right. This can be by a person or it could be by a computer right, algorithms. Now it's kind of funny, because apes talk about high frequency trading and algorithm trading and some of the malpractices that can come from that entire process and people don't ever talk about the options market being one of these processes, you want to see an example of hedging In both directions, right to me, this is one of them. This is an example of hedging in both directions.

Look at this right! I don't know why my freaking weeple does that here we go. This is unhedging. This is market makers that decided to sell stock back into the market because they don't any longer need that risk for the underlying stock. They don't need to hold anymore because it's not currently in the money.

There was a lot of call options on emc today as an example: 21 29, 000 at 59 bucks at 30, 000 at 60 bucks and it broke underneath 60 bucks, which can lead to unhedging market makers that decide to sell underlying stock back into the market right. So that's an example of unhedging hedging. If you want to look at one hour candles. This is an example of edging that's gamma, squeezing essentially hedging takes place when market makers have call options and a lot of them that start running in the money they have to buy stock from the market.

In order to be able to, you know, save their butts, and i'm gon na, like i said, get into this in a different video, but computers or people can be doing that and that's also an underlying issue right. So that's kind of the whole process of what an actual market maker is an options market maker, i should say right and the entire walk through talk through of that process. I know it might be a little bit confusing if you're new to the stock market. There's probably people in here who think this is maybe too dumbed down.

There's a broad variety of experience levels out there, but hopefully it's provided you some value. There's gon na be two more videos coming watch for them. It's gon na be hedging and unhedging. I'm gon na walk you through both of those processes for anybody.

That's curious and i might end up making a third one talking about actual gamma squeezing and what that is and how this can create this endless feedback loop, so blah blah blah those people drop. Like a hit subscribe, everyone do my friends catch on the next one hope you guys got some value out of this much love light taps and peace.

By Trey

27 thoughts on “How do options market makers really work? – gamma series 1/4”
  1. Avataaar/Circle Created with python_avatars Isaac Gary says:

    Just got an ad that said "forget what you know about options" im like thats why Im watching this video!!! Im not forget Treys teaching go f yourself youtube ads!

  2. Avataaar/Circle Created with python_avatars Margarita Honest says:

    AMC is a great buy at the moment, but do you have an Idea how well it would do? I just retired and I set aside $200,000 to invest aggressively with. mainly AMC and NIO. Let me know your thoughts y’all.

  3. Avataaar/Circle Created with python_avatars Terre Alexander says:

    I need this is going to be a playlist…. I just waited for all four videos to be released.

  4. Avataaar/Circle Created with python_avatars Mateo Needham says:

    Thanks so much for making these explanation videos, Trey. You rock!

  5. Avataaar/Circle Created with python_avatars James Smith says:

    After watching this video 3-4 times over the weekend, I Think I kinda, sorta, almost Understand all this shit!

  6. Avataaar/Circle Created with python_avatars Mike Miller says:

    When you exercise a call say Thursday and it is in the money, Friday comes and the price drops. Are there a penalty or anything like that?

  7. Avataaar/Circle Created with python_avatars Robert Wallace says:

    Excellent information!!! Thank you, TC as I'm a rookie in this game….

  8. Avataaar/Circle Created with python_avatars Christopher28 says:

    This man's will single handedly teach everyone how to climb out of the dirt this world has put us in

  9. Avataaar/Circle Created with python_avatars Gaz newman says:

    U talk so fast i had to slow you down to 0.75, now im listening to what appears to be drunk Trey talking about options 🙂

  10. Avataaar/Circle Created with python_avatars Salty Ape Lincoln says:

    The legal fee for FTDs should be waaaaaay more than a measly 10k. What would u rather do? Pay 10k to SEC for FTDs or stand to lose BILLIONS at once. Yeah, I would take tht tiny 10k hit too.

  11. Avataaar/Circle Created with python_avatars ed salbo says:

    Thanks Trey, I feel like I have a clear mental of image of the Options Market and how it works.

  12. Avataaar/Circle Created with python_avatars THIS IS YOUR TRANSMISSION says:

    what happens to the owner of the option contract when he exercises his right to buy the shares when there is a FTD giving. Does the contract holder get his shares or not?!

  13. Avataaar/Circle Created with python_avatars Steve G says:

    Thanks Trey. That means we a red week is a possibility?

  14. Avataaar/Circle Created with python_avatars WhiteCrow says:

    you trapped me into watching the first 3 seconds of this video on 0.025% speed for the rest of my life. Well played

  15. Avataaar/Circle Created with python_avatars James Russell says:

    Thanks for the series your dropping this is excellent knowledge to learn

  16. Avataaar/Circle Created with python_avatars CasualXPlayr says:

    Im interested in learning this topic but you speak too fast for me to follow

  17. Avataaar/Circle Created with python_avatars Yo Yo says:

    TREY! Please hire someone to moderate these comments, there is NOTHING but scams and weird comments about dr camile hilton, like WHO TF???

  18. Avataaar/Circle Created with python_avatars Jay S. says:

    This guy can draw DBZ characters but has chicken scratch hand writing lol

  19. Avataaar/Circle Created with python_avatars Langdon Taguiped says:

    I'm learning a shit ton of shit from you!! Thank you and keep up the good work!! Many light taps!!

  20. Avataaar/Circle Created with python_avatars Sleepy says:

    thank god for this dude! im so bored of the internet (says me a college prof in my 30s. cable tv netflix and the internet all equally boring but these new stock market youtubers are entertaining and educational). watching this with my sunday midday (i.e. "morning") coffee. love how fast he talks in certain parts LOL

  21. Avataaar/Circle Created with python_avatars WoodyWoods89 says:

    Isn't Citadel Securities the MM as well? What does that mean for us.

  22. Avataaar/Circle Created with python_avatars Sabine Lehner says:

    Money is an issue that everyone has for a better and luxurious life, life was hard for me until I started trading Bitcoin and now earning $22,000 per week

  23. Avataaar/Circle Created with python_avatars Mike from Louisiana says:

    Love when my wife says “ this is treys trades where we talk fast and slap that ( and then She slaps my buttocks )” 😮

  24. Avataaar/Circle Created with python_avatars Luis Aragon says:

    This is i a character he is a fake. This guy charges for super chats like a little weasel

  25. Avataaar/Circle Created with python_avatars Domenick Pace says:

    I made a comment on Wednesday about robinhood and etrade . Thursday robinhood logged me out of my account and Google locked me out gmail that the account tied to robbing hood! Has anyone have this happen?

  26. Avataaar/Circle Created with python_avatars rich tanzza says:

    you told them Friday was going to be AMC day and they pulled out all the stops and drove the price down. They just kept dumping stocks.

  27. Avataaar/Circle Created with python_avatars rich tanzza says:

    Do you understand that as soon as you make a video or go on TV they are watching! They are dirty dudes and they showed that the dark poll and the power they have to rig the maker. How can you tell how many were covered calls!

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