Do market makers hedge before or after options expire when selling options?
- Thread starter Amatrue
- Start date
Do you think market makers want to hold large deltas for a long time? If so, what's the difference between a market maker and a trader?
Would you please elaborate a little bit? I would very much appreciate your time.
Well, if market makers would hold large directional books (large positive or negative delta), then they wouldn't differ much from directional traders. This is why they do their best to hedge this exposure. Now how often do MM's hedge their deltas? Depends, some HFM (High-Freq Market makers) likely do it instantaneously, where as some might hedge only once a day or once certain limit is reached.
Im not the right guy to teach these things, but there are many handles posting on this forum that have 15+ experience in options market making, so look up to those for better understanding.
this was helpful thank you.
Having worked for with a market making group in options back in the trading floor days the hedge is usually immediate.
I've posted this before, but it's been a while.
I was in a group about 15 years ago, and we used to like to average in and out of stocks. We called it Layering, but Finra has a different definition of layering and we didn't do that.
For instance, we loved averaging in and out of GS, and we would always hedge with puts. But here's the deal.... We would buy the puts first. Not a huge amount. Usually no more than 100 contracts.
But we would know the options market maker would have to sell the stock to remain hedged. We would instantly see a small but sharp dip in the stock and bid into it for a small bargain.
Yes, it's immediate. They have to hedge. It's their job. But the above doesn't work anymore. Please don't try it.
JNB
I was in a group about 15 years ago, and we used to like to average in and out of stocks. We called it Layering, but Finra has a different definition of layering and we didn't do that.
For instance, we loved averaging in and out of GS, and we would always hedge with puts. But here's the deal.... We would buy the puts first. Not a huge amount. Usually no more than 100 contracts.
But we would know the options market maker would have to sell the stock to remain hedged. We would instantly see a small but sharp dip in the stock and bid into it for a small bargain.
Yes, it's immediate. They have to hedge. It's their job. But the above doesn't work anymore. Please don't try it.
JNB
In in a similar thought I spent a couple summers clerking for a large broker in a certain commodity pit. You would see the order flow. If there was a large sell order of ATM calls you knew the locals who bought the ATM calls would immediately hedge their trades in the futures pit. 1,0000 ATM calls with a delta of .5 means an immediate sell of 500 contracts in the market. This was an ag pit and at the time that type of order would usually knock the futures down a few cents. Now let's say that savvy clerk who knew these orders were coming and would let a scalper or small spreader in the futures pit know with a signal to front run these hedges. Illegal but how do you prove it happened? Oh the pits were more fun than a screen but more ways to fuck over the retail paper. But I guess one could argue HFT and dark pools its all the same.