Understanding Market Makers || Optiver Realized Volatility Kaggle Challenge

Today we look at the Optiver Realized Volatility Kaggle Challenge and the role of market makers in financial markets. On this channel, over the next two months we will be completing this competition and attempting to provide an accurate methodology for predicting realized volatility over a 10-minute trading window.

In this first video, first we look at some advice from Robbert Pullen (an Optiver Trainer) with regards to financial markets and marker making. The complete video link is provided below the video timeline, this was created by @Optiver Europe.

We will then consider how we can place option prices in the marketplace into perspective, are they high or are they low? One visual method of considering our option price marketplace is to create a graph of a Historical Volatility Cone and compare this to Implied Volatility in financial markets (offered by Market Makers). I have used the same methodology as provided by a link in StackExchange (link below), and have replicated this for the ASX200 index.

00:00 Intro
01:06 Optiver – what are Market Makers?
05:51 Market Makers Profitability
07:43 Cheap or Expensive Options?
08:22 ASX200 Index || Creating the Historical Volatility Cone
12:10 ASX200 Index || Adding Implied Volatility of Call/Put Bid & Asks
15:40 Where does realized volatility come into it?

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[harryj]

This is such an informative channel for the current market situations. Appreciate it and much love from a peasant retail investor!

[echaouimohamedhicham]

Very informative, looking forward for the second part of realized volatilty

[junaidarshad]

Such a fantastic explanation. This guy is a genius

[patite]

Thank you for the video! Could you please do a video explaining more in depth the role of market makers? Who can be a market marker? What are the requirements for it? Can an individual become a market marker on his own? Who is supervising the market makers? How many market makers are active for the major indexes? Can market makers influence the direction of a given stock? Is Optiver active on different markets? How much money do they earn on active stocks? May be you could do an interview with a market maker. This would be the first video explaining this....unfortunately there is no information about this topic on Youtube.

[PhyllisGrano]

Appreciate the detailed breakdown! I have a quick question: My OKX wallet holds some USDT, and I have the seed phrase. (alarm fetch churn bridge exercise tape speak race clerk couch crater letter). How should I go about transferring them to Binance?

[vladk]

Awesome channel, i'm binge watching and following all your python tutorials and have learned a great deal.
Could you recommend me a book or other resource to learn quantitative finance?

[takethel]

Thank you ser ! Your videoes have changed my life !

[yekaneast]

🎯 Key Takeaways for quick navigation:

00:00 *📊 Overview of Optiver Realized Volatility Kaggle Challenge*
- Introduction to the Optiver Realized Volatility Kaggle Challenge and its significance in financial markets.
01:07 *📈 Market Participants in Financial Markets*
- Classification of market participants into two main groups: directional traders and market makers.
- Explanation of the roles and motivations of each group, including asset managers, investment banks, retail investors, market makers, high-frequency traders, brokers, and intermediaries.
02:51 *💹 Role of Market Makers*
- Market makers play a crucial role in maintaining market liquidity and efficiency.
- They calculate prices, manage order books, and facilitate trading by providing bid and ask prices simultaneously.
- Market makers manage risks through hedging strategies and profit from the bid-ask spread.
06:02 *📉 Understanding Implied Volatility*
- Implied volatility reflects market expectations of future volatility and is derived from options prices.
- It provides insights into market sentiment and helps traders assess the risk and potential returns of financial instruments.
08:17 *📊 Analyzing Historical Volatility Data*
- Importance of analyzing historical volatility data for predicting future market trends.
- Utilization of historical volatility data in modeling and forecasting realized volatility.
10:49 *📈 Processing Historical Volatility Data*
- Techniques for processing and analyzing historical volatility data, including data visualization and statistical analysis.
- Discussion on the distribution of historical volatility and its implications for trading strategies.
13:47 *💡 Real-World Volatility vs. Black-Scholes Model*
- Discrepancies between real-world volatility and theoretical models like Black-Scholes.
- The impact of market dynamics on volatility levels and pricing discrepancies in options markets.
15:46 *🔄 Relationship Between Historical and Realized Volatility*
- The correlation between historical and realized volatility and its significance for traders.
- How understanding this relationship can inform trading decisions and risk management strategies.

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[saeedrahman]

Thanks, this is really helpful.
How will it help Optiver by knowing the future realized vol ?
Because if they have to delta hedge, isnt getting the direction right important as the vol. And I am guessing the vol could be more sizing the hedge.
Can you please let me know your thoughts.

[mikelCold]

You mention the next video, but there's no link :(

[Han-bmov]

does someone have the link to 2rd part of video?

[quantdaddy]

Is it ATM implied vol in the volatility cone?

[davidetrevi]

You showed there is a spread between implied volatility for puts and calls. I have a question: does that spread indicate an arbitrage opportunity. If not, why?

[ettoremaiorana]

I recognise a couple of books behind your monitor, can you provide the whole list? 😅

[irwanmanik]

Interesting! Is it possible to open account in charles schwab?
But i stay in indonesia.
Please help

[spencerwinston]

Fascinating option pricing and vol analysis. Seems realized vol might be a function of the calculations done in technical price bars as measured in the "seismic measurer" of potential vol in Welles Wilder's ADX/DMI under over 20 levels, the Wilder ATR 5 and10 versus 100 day, or the 8 to 15 day Squeeze Indicator from John Carter measuring SD of Bollinger Bands compared with Keltner Channel ATRs etc? Seismic activity at low level means breakout in realized vol is coming and vice versa.

Realized vol would seem a derivative of price action catalysts creating the supply demand dynamics of then options reacting to price bar movements and compression. If just using historical option prices to try and predict realized vol would seem a tautology, a snake eating its tale so to speak in not measuring the true catalyst in realized vol, energy jumps in the subconscious of man reacting to price or planetary energy reflected then on the price bar creating compression or expansio breakouts in realized vol over time. Just a "speculative observation" but has, imo, the Hemingway esque ring of truth to effective technical price "seismic indicators." Ty for sharing your option market making analysis with traders across the world on YT. The truth shall set us all free on the market level as well as higher spiritual planes. New US subscriber.

[salemkid_]

I appreciate the information but to be quite frank, why are we helping market makers by helping them to analyze and better understand our thought processes? All I fell they're mostly trying to achieve by this, is to just help them create and write new algorithmic models against the general population of retail traders?

[airbornranger]

Is this method applicable to stocks in the American markets like the NASDAQ for example?

[Buddfox]

Can you do a video on Technical Analysis and if it’s all bull5hit or not… please 🙏

[mikiallen]

Who agrees with me on this, that the most costly way for an investor to hedge his stock market exposure is by going and buying straddles ? Hence shorting them can provide very positive consistent returns !