Mark Galant: floor background helps interbank OTC trading.
By Stein, Jon
Publication: Futures (Cedar Falls, Iowa)
Date: Saturday, December 1 1990
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After working as a stockbroker, futures trader and options market maker
trading just about everything but foreign exchange, Mark Galant found his calling as senior options trader at Chemical Bank in New York.
The former floor trader's relationship with the trading floor now is largely for offsetting trades in over-the-counter (OTC) options on cash foreign exchange.
Galant slices his work into three categories: making markets, arbitrage between markets and taking positions. Exchange-traded instruments - like Chicago Mercantile Exchange (CME) futures and options or Philadelphia Stock Exchange (PHLX) cash-settled options - play a role in the first two.
Making markets in OTC options is quite different from exchange floor trading. While floor trading is based on an auction-like exchange of instruments with standardized strike prices and expiration dates, the interbank option market is more flexible, letting traders custom-design just about any position.
The floor often can act as a pricing guide for OTC options traders. Frequently, when another dealer calls up for an out-of-the-money cash option, Galant will call the exchange floor for a quote on something similar.
If there is a transaction, Galant may use the floor to hedge that position. For instance, if the desk were long PHLX options soon to expire that hedged short OTC options positions expiring several days later, the desk would be exposed for that short period. He says such residual exposures, or mismatches," are common.
"Until (those) last few days, there's not that much risk," Galant says. For the large mismatches, we try to piece out of them over time. Usually, I'll just slowly unwind it and keep an eye on it "
But he can have some fun with it. Like the rest of the desk, Galant is a conservative position taker, but the floor trader in him recognizes opportunity. Many mismatches can turn a nice profit if managed prudently.
For instance, assume his desk had purchased $30 million worth of yen call options with a strike price of 135 yen to the dollar to expire a month from now. Suppose U.S. trade figures were to be released. In hedging that position, Galant says you can sell an equal amount of the same strike to expire a day earlier. Why? The rapid decay of the option's time value has been offset. The one day left uncovered promises to be a volatile one, and the desk is given a "free" day of opportunity with almost no downside risk, Galant says.
By Stein, Jon
Publication: Futures (Cedar Falls, Iowa)
Date: Saturday, December 1 1990
Share:PrintMore You are viewing page 1
Ads By Google
As a small business owner
You don't have to go it alone. Vistage® can give you a hand.
Vistage.com
After working as a stockbroker, futures trader and options market maker
trading just about everything but foreign exchange, Mark Galant found his calling as senior options trader at Chemical Bank in New York.
The former floor trader's relationship with the trading floor now is largely for offsetting trades in over-the-counter (OTC) options on cash foreign exchange.
Galant slices his work into three categories: making markets, arbitrage between markets and taking positions. Exchange-traded instruments - like Chicago Mercantile Exchange (CME) futures and options or Philadelphia Stock Exchange (PHLX) cash-settled options - play a role in the first two.
Making markets in OTC options is quite different from exchange floor trading. While floor trading is based on an auction-like exchange of instruments with standardized strike prices and expiration dates, the interbank option market is more flexible, letting traders custom-design just about any position.
The floor often can act as a pricing guide for OTC options traders. Frequently, when another dealer calls up for an out-of-the-money cash option, Galant will call the exchange floor for a quote on something similar.
If there is a transaction, Galant may use the floor to hedge that position. For instance, if the desk were long PHLX options soon to expire that hedged short OTC options positions expiring several days later, the desk would be exposed for that short period. He says such residual exposures, or mismatches," are common.
"Until (those) last few days, there's not that much risk," Galant says. For the large mismatches, we try to piece out of them over time. Usually, I'll just slowly unwind it and keep an eye on it "
But he can have some fun with it. Like the rest of the desk, Galant is a conservative position taker, but the floor trader in him recognizes opportunity. Many mismatches can turn a nice profit if managed prudently.
For instance, assume his desk had purchased $30 million worth of yen call options with a strike price of 135 yen to the dollar to expire a month from now. Suppose U.S. trade figures were to be released. In hedging that position, Galant says you can sell an equal amount of the same strike to expire a day earlier. Why? The rapid decay of the option's time value has been offset. The one day left uncovered promises to be a volatile one, and the desk is given a "free" day of opportunity with almost no downside risk, Galant says.
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