An axe (or “axe to grind”) is the interest that a trader shows in buying or selling a security that is typically already on their books. If a trader holds a long position, but has short-term concerns, that trader’s axe toward short-term put options may be significant. Likewise, if a trader has risk exposure to an increase in interest rates, he may have an axe to hedge against that risk. Many times, a trader with an axe will keep that information private, since if other market participants become aware of his motivations they can take advantage of that information by offering unfavorable prices or withholding certain trades in order to exploit the situation.
BREAKING DOWN ‘Axe’
The term axe is derived from the phrase “axe to grind,” which means to possess an ulterior motive or selfish aim. The phrase has historically meant to have a grievance with someone, especially where one feels the need to seek retribution. The phrase probably originates from the act of sharpening an axe with a grinding wheel, with the intent (in this definition) to get revenge on someone by maiming or killing them.
Traders often use the term axe to represent someone’s particular interest…