20 Things to Do Before You Ask for a Price (Part 1)

I wanted to welcome you all to a new, 4-part series of the Alpha Exchange, “Twenty Things to Do Before You Ask for a Price”.  In short, this is my thinking on what a derivatives salesperson ought to do instinctively and nearly instantaneously in his or her interaction with a trader colleague being asked to price option risk for a client. These 20 things constitute a real time to do list for the salesperson that adds alpha to the process of price discovery and can allow the trader to take more risk by mitigating certain kinds of risks.  In this short podcast, I share the first 5.  I hope you enjoy and find this useful.
 

1. Know the client.  Who is the client, what is desk relationship and what are the client’s expectations? This starting point is a critical component of quarterbacking the price discovery and execution process. Every client is unique.
    
2. Know the risk environment.  Is vol better to buy or are clients dumping options? What is the backdrop for the commitment of capital around the street? This is critical to managing expectations.
    
3. What motivates the specific trade?  Is the client likely buying or selling vol?  Is he/she opening, closing or rolling?
    
4. What is the stock?  How well does the stock trade?  Is there news out in the stock?
    
5. Buy yourself time.  If it is an off-the-run name with a ticker you have never heard of, let the client subtly know you have never heard of it (nor should you have).  This provides a bit more time for the trader.