Thread by @VolSignals

90% of options data sellers get this wrong.

Let's say Esoteria really does sell me 100 Jun 5200/5600 Put Spreads.

We both trade live (no hedge).

We cross in Cboe's Complex Order Book
(sorry MBI no bro on this one)

How does each method capture the trade..?

First, naive portfolio construction.

It holds:
» Customers buy puts to hedge
» Customers sell calls to finance hedging

Market makers are therefore:
✓ Short all the Puts in the OI
✓ Long all the Calls in the OI

Dealer position, naive construction:

Short 100 Jun 5600 Puts
Short 100 Jun 5200 Puts

Market impact (dynamic) after our trade:
🔸Short Gamma
🔸Shorter Gamma to downside
🔸Charm influence is bullish until between strikes
🔸Market more volatile on selloffs

Next, Dealer Directional Open Interest (DDOI).

It holds:
» Customers pay the bid/ask to trade.
» Dealers collect the bid/ask (trade for edge).

Market makers are therefore:
✓ Buying the contracts trading closer to the bid
✓ Selling the contracts trading closer to the ask

Esoteria may be a great trader and correct on stuffing me with this June Put Spread.

But when it trades, I'm more likely to work the order below theo to get a decent execution price.

Dealers will see the Jun 5200 5600 PS trading .15 under on the COB.

So will the data boiz.

Dealer position, DDOI:

Long 100 Jun 5600 Puts
Short 100 Jun 5200 Puts

Market impact (dynamic) after our trade:
🔸Long Gamma until ~ 5350-5400
🔸Shorter downside Gamma
🔸Charm bearish > 5600, bullish between 5200-5600 and bearish < 5200
🔸Supportive, then volatile down moves.

Finally, Cboe-signed trade data:

It provides:
» Actual net long (short) per contract, by entity type

Market Makers are therefore:
» Long (short) whatever the Cboe says they are.

Dealer position, Cboe-signed data:
(no change)

Market impact (dynamic) after our trade:
(no change)

#3 is the only correct answer.

You're misled by 90% of the data services.

They use methods (1) or (2) and don't know, or don't care, that they're selling you noise.

We're just getting started.

You know the drill.
Retweet the thread & I'll keep going...