Do market makers in practice really hedge SPX and ES options in SPY or does the reverse occur often?
Show this thread
-
If I buy futures I am effectively long stock financed at wherever the lending rate clears (in practice ~LIBOR). If I buy SPY I need to get financing from my broker, who will charge me ~LIBOR + spread. The spread is responsible for the cost of carry difference.
Every derivative introduces a new parameter required to price it in a model, and the derivative becomes a way to trade that parameter. In the case of options the parameter is implied volatility. For futures/forwards the parameter is the basis (~dividends minus financing)
-
-
Prob silly Q, but why cant you use cash to buy SPY? Why would you need financing from broker? Very insightful. Broker spread drives cost of carry. Anything that offsets the benefit of futures? Since they have certain risk SPY itself lacks right?
-
The delta you need to hedge may be larger than your unencumbered cash balance (plus you are probably not just trading one market, there will be many demands on the same $ of capital -- if at a bank, your desk will get charged by treasury for its capital usage)
- Show replies
New conversation -
-
-
"Every derivative introduces a new parameter required to price it in a model, and the derivative becomes a way to trade that parameter.” I love that.
-
This Tweet is unavailable.
- Show replies
New conversation -
Loading seems to be taking a while.
Twitter may be over capacity or experiencing a momentary hiccup. Try again or visit Twitter Status for more information.