bingo lottoBeing an option market maker has a few drawbacks. It’s impossible to explain to friends and family what you’re doing (“what? no clients?”). Faced with new friends or in-laws I try the Monty Hall Dilemma (aka 3 doors dilemma) on them to get a grasp of their statistical curiosity. If explaining the simple quiz show question doesn’t work I usually give up and accept the nickname “Chandler”.

Option metaphor

Lately I’ve thought of a new metaphor for my job as options market maker. Imagine there’s a lottery with 100 tickets and price money of 100 dollar. If you buy all the tickets, you are sure to win the money. If you find a way to pay less than 1 $ per ticket, you’ll be in a free money game. Let’s take this example a little further. You will also make free money if you sell all the tickets for more than a dollar. You will have to hand out a 100 dollar prize to the winner, but you’ve made more than 100 dollar on selling the tickets so you’ll end up with a riskless profit.

The elementairy principles remain the same, but in the world of options trading there are a few complexities which make the game more enjoyable in the long run. The size of the jackpot isn’t fixed nor the number of lottery tickets. Somehow, using this metaphor is easier than explaining volatility, dividends and skewlines..

Jack
Jack