1.3 & 1.4 Market Making And Profiting As A Market Maker

In the 9th and final inning of the MLB all-star game, the outcome of the game becomes more certain as it nears its end. Therefore, any events that occur during this inning, such as getting 2 men on base or a strikeout, will have a greater impact on the perceived likelihood of each team winning. This increased certainty will lead to greater price swings in the contract, as the market reacts more strongly to these events and adjusts the price accordingly.

A liquid market refers to a market with high trading activity and a large number of participants. In such a market, there is a higher volume of buying and selling, which leads to a higher level of liquidity. This increased liquidity allows for tighter bid/offer spreads, meaning that the difference between the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept is smaller. This is because there are more buyers and sellers available to match orders, resulting in a more efficient and competitive market.

This statement is true because even if a position is correct in the long-term, market conditions or external factors can cause short-term fluctuations that may result in being forced to exit the position before realizing any profit. This can happen due to factors such as sudden market volatility, unexpected news events, or changes in investor sentiment. Therefore, it is possible to be correct in the long-term but not realize any profit in the short-term due to these factors.

After the American League won the all-star game and secured home field advantage in the World Series, the likelihood of the Yankees winning the World Series also increased. This increased probability of the Yankees winning the World Series caused the price of the contract to increase.

A market maker quotes a bid-offer spread on an option(s) by showing a bid under his theoretical value and an offer over his theoretical value, if the market he makes is not faded. This means that the market maker is willing to buy the option at a lower price than his estimated value and sell it at a higher price. This spread allows the market maker to make a profit from the difference between the bid and offer prices. If the market maker's quotes are not faded, it indicates that there is a demand for the option at those prices, making the statement true.

The contract should be trading at $0.70 because the current forecast is predicting a 70% chance of rain. This means that there is a 70% probability that it will rain, and in that case, the contract will be worth $1. Therefore, the expected value of the contract is $0.70.

In the context of the options trading industry, the term "edge" is used to describe the difference between the trade price and the current fair value of an option. This difference represents an advantage or an edge that traders can exploit to make profitable trades. By understanding and analyzing this edge, traders can make informed decisions about buying or selling options, potentially maximizing their profits.

A margin call occurs when the clearing firm requires the investor to deposit additional funds to cover the potential losses of their position. This is typically triggered when the value of the investor's collateral falls below a certain threshold, as determined by the firm's margin requirements. The purpose of a margin call is to ensure that the investor has enough capital to cover their obligations and minimize the risk of default.

An options market maker is not like a casino taking bets at a roulette wheel. In options trading, market makers facilitate the buying and selling of options contracts by providing liquidity to the market. They do not take bets or place their own money at risk. The comparison to a casino is inaccurate and misleading. Therefore, the statement is false.

After EJI declined to meet the margin call, the bank did not delete his account and position or forfeit the position to the SEC. Instead, they asked the marketplace for bids to buy the position. This means that the bank sought potential buyers in the market who would be interested in acquiring EJI's position. By doing so, the bank aimed to sell off the position and recover any potential losses or mitigate further risks associated with EJI's position.

This statement is false. While collecting the difference between the bid/offer and fair value may seem like a riskless way to make money, it is not always the case. The bid/offer spread represents the cost of trading and reflects the market's liquidity and volatility. The fair value is the estimated intrinsic value of an asset. The difference between the bid/offer and fair value can vary and may not always result in riskless profits. Market conditions, transaction costs, and other factors can affect the profitability of this strategy.

Exchanges need market makers to provide liquidity to the market by constantly buying and selling securities, ensuring that there is always a ready market for traders to enter or exit their positions. Market makers also help provide price stability by narrowing the bid-ask spread and preventing extreme price fluctuations. Their presence in the market ensures that there is sufficient trading activity and reduces the risk of illiquidity.

The given answer suggests that Eji's position was given up to the clearing firm because he did not post additional margin. This indicates that Eji's position was not properly hedged and resulted in losses in the short-term. However, it is implied that if Eji had posted additional margin, the position would have eventually made money in the long-term.