Option Market Mechanics

Market Mechanics Sample Lesson
  • You'll get a 30,000-foot view of the option market and see how exchanges, market makers, high-frequency trading firms, and institutional and individual investors interact with one another.
  • You'll understand how and why institutional investors might choose to execute option transactions in the listed look alike market or on the exchange.
  • You'll understand how high-frequency traders get access to the exchange.
  • You'll get an idea about how market makers think about inventory risk and how they hedge against it.
Vocabulary List:
Axe

Buy Side

Cash Market

Direct Market Access

Hedge

Hedge Fund

While options are simple, directional investment instruments, some of the option characteristics we’ve discussed lead to the logistics governing option transactions being more complex than those related to stock transactions. It is vital that you understand these logistical details — if you do not, you run the risk of making money-losing “unforced errors”!

The course…

  • teaches you about the logistics surrounding expiration cycles,
  • shows how strike prices are determined and established,
  • teaches you the nuances behind option transaction volume statistics that make them very different from those you may be used to,
  • explains the role of market makers and various “buy-side” players,
  • looks at differing perspectives on high-frequency traders (HFT), and
  • explains the basics of the institutionally-focused FLEX option exchange.

The snippet from the video you see above is from the lesson “Option Market Dynamics” and shows a schematic overview of the various players in the option markets.

Our overall goal for this course is to give you the tools you need to understand the information available from option exchanges and to make option transactions smoothly, safely, and without error.

Supplemental Resources