Dan sits down with longtime market maker Kevin “Lex” Luthringshausen to demystify how options markets actually work behind the scenes. They cover dealer/market-maker behavior, why hedging is the real “edge,” how dispersion trading works, and what payment for order flow (PFOF) really is—and why it matters for retail traders. The conversation finishes with practical guidance for covered calls, cash-secured puts, and the “poor man’s covered call” (fig leaf), plus Lex’s favorite trading books and films.

Key Topics

• What wholesalers are and how payment for order flow (PFOF) works
• Market makers vs. retail: why market makers hedge, not predict direction
• Greeks in practice: building and neutralizing delta, gamma, vega exposure
• Dispersion trading: baskets vs. SPX volatility, correlations, Mag-7 implications
• Retail edge (and limits) with implied volatility (IV vs. realized vol)
• Covered calls & cash-secured puts: when IV matters most
• The fig leaf / poor man’s covered call: benefits, risks, and skew considerations
• What retail traders are actually trading now (iron condors, diagonals, calendars, credit spreads)

Lex’s Practical Takeaways

• Hedging is the business. Market makers quote both sides and hedge continuously; the “win” isn’t directional prediction but capturing edge and neutralizing risk.
• Retail order flow helps pricing. Small, frequent retail trades help “shape the curve,” tightening markets and often improving prices.
• PFOF trade-off. It helps enable low/zero commissions and tighter spreads; without it, expect higher commissions and wider markets.
• Use IV thoughtfully. For income strategies like covered calls and CSPs, prioritizing higher (overpriced) IV can improve premiums—but verify it’s truly overpriced for the current environment.
• Fig leaf caution. LEAPS are vega-sensitive; vertical and term skew can mean you’re buying higher vol and selling lower vol. Price the whole structure, not just the short call.
  

Resources Mentioned

• NBBO (National Best Bid and Offer) — the best available public bid/ask across exchanges
• The Options Playbook by Brian Overby
• Classic films: Trading Places, Wall Street (and a messenger-desk trading film Lex couldn’t recall by name)

Connect

• Learn more about host Dan Passarelli and Market Taker Mentoring: MarketTaker.com
• Subscribe on your preferred platform (Spotify, Apple Podcasts, etc.) and leave a review to help more traders find the show.

Disclosure:

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, investors must read Characteristics and Risks of Standardized Options (ODD) which can be found at https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document

Don’t trade with money you are not prepared to lose. Anything discussed on this show is intended to be generalized information and not intended to be a recommendation to buy or sell any security. The host and guests are not familiar with listeners’ specific situations. For trading information relevant to your specific needs, speak with a licensed broker or advisor.

Trumpet
Trumpet Fanfare by bevibeldesign -- https://freesound.org/s/350428/ -- License: Creative Commons 0

Wah Wah Wah

Wah wah trumpet failed joke punch line.wav by Doctor_Jekyll -- https://freesound.org/s/240195/ -- License: Attribution 4.0