Option Market Making: Trading and Risk Analysis for the Financial and Commodity Option Markets

by Allen Jan Baird

Approaches trading from the viewpoint of market makers and the part they play in pricing, valuing and placing positions. Covers option volatility and pricing, risk analysis, spreads, strategies and tactics for the options trader, focusing on how to work successfully with market makers. Features a special section on synthetic options and the role of synthetic options market making (a role of increasing importance on the trading floor). Contains numerous graphs, charts and tables.

Genres: Finance

224 pages, Hardcover

First published October 16, 1992

Reviews

[Jun · Rating 5 out of 5]

Despite its age, Allen Jan Baird's writing is some of the most intuitive I've read on options theory. While there is a precedent requirement for basic statistics knowledge, especially in regard to probability distributions key to understanding concepts surrounding delta, this is an accessible work, perfect for any OMM intern or young student seeking to enter a quantitative trading role. This is perhaps the most underrated textbook on the subject I have ever encountered.

[Noah H · Rating 4 out of 5]

I wish there was a revised edition for the digital age, but I think this book is still the best guide on the fundamentals of option market making. Put call parity and synthetic options trading had never really "clicked" until I finished reading this book. Definitely worth a read, even in 2025.

[Ian Wagner · Rating 4 out of 5]

This book will not be particularly useful if you don't have any background in options (read Sinclair's Options Trading first), and some bits are showing their age now, but overall this was a fantastic book. There isn't really anything like it in terms of nuts-and-bolts depth re: options market making that I'm aware of, and I found it immensely helpful. My only real criticism is that there are a few points where the author makes some statement as if it were obvious without further explanation. Definitely more tolerable than stuffy academic papers though, and overall this was a fantastic book.

[Robert · Rating 4 out of 5]

On the surface, Option Market Making might seem like a rather antiquated book – it was written in 1992 when option trading was exclusively done by humans in pits, a far cry from modern electronic market making. But this setup lends quite a lot of pedagogical value to the book, making it a good resource for beginners, and also provides a slightly different perspective versus other options books, for those who are already somewhat familiar.

The book builds intuition in model-free options trading: how to reason about options without purely plugging numbers into some pricer. Baird discusses put-call parity in depth – not just the concept, but also what it means for a market maker in practice – including seldom-discussed topics like synthetic options positions. Futures options are given equal treatment to equity options, since in the model-free world they are not much harder to think about (though they do carry different risks, which Baird explains in detail).

Option Market Making is a how-to guide for option market makers – a handbook of actionable wisdom, rather than a treatise on the mathematical properties of options. Baird emphasises the importance of knowing what risks you have and avoiding blowups. One gets the sense that several of these lessons were learnt the hard way! While the book could be used as a first text on options, it is probably not suitable for someone who is brand new to trading more generally because Baird implicitly assumes basic familiarity with the function of a market maker, and options are taught from the point of view of someone who has to manage an option portfolio.

[Carl Yang · Rating 3 out of 5]

Is good, but nowhere near as descriptive as Natenberg Option Volatility & Pricing. Sometimes, doesn't spend enough time to explain certain logic