IWM Market Maker Sweet Spot Calculations
How do we get to the Sweet Spot
Derived from the amount of OPEN INTERESTS multiplied with 100 shares per contract times mid price gives us a good estimate what money is at stake and where the Market Maker will make the most money, or better said will lose the least! This is the spot where the market maker wants to be every Friday when there is Option Payday.
We notice that there are 1.56 Put Options for every Call option as open interests on the books. Traders are bracing for a down turn? We also see that there is a deviation between current price and sweet spot. IMO this might disappear by Friday. Market Makers will mobilizes every opportunity to get the price down. We can see that when the price came down to $224 and $226 that there are much less losses for the Market Makers. The difference is about 400 million Dollars!!
The Call / Put Distribution.
Reds are Puts and Green are Calls. Each column represents a certain Expiration Date. Current Price is market in yellow. We have two walls of Call options left and right of the current price with about 100,000 contracts each. I cannot imagine that the MM will let the price break through the $235 level in order to lose an additional 120,000,000 Dollar. The price will settle either at $231 just north of the wall or best at $228, south of the wall. But this would require a bigger pressure to the downside. Not sure if the MM can do that. But why not sitting back and just watching the outcome
The remote green arrow to the right is a Put Credit Spread to hedge the 238 Call Credit Spread. The Delta of the short leg grew above 30%, hence I turned the Spread into an weighted Iron Condor.
Support and Resistance Level
Looking at the support levels we can see that the Market Maker might just want to move the price south of the support wall at $231. I predict the IWM will settle at around $231 for limited losses for the Market Makers or best at $228 to cash in the biggest profit. Either position wont hurt me.
This week will have some big numbers coming out.
There are a few things to watch out this week. Job numbers, ADP non farm payroll on Wednesday, the FOMC statement on tapering. The Purchasing Manager Index for manufacturing came out Monday and Service Industry on Wednesday. Interest rate settings on Wednesday 10 am EST. These data and announcements will rock the markets.