Actually, they generally don't hedge with options, and typically just have to eat huge losses in big moves. They will then hold the shares and try and get rid of them on the (hopefully) way back up. That's why it is really good to be a specialist 99% of the time, and really expensive the other 1%. It's also why a lot of the small specialist firms no longer exist, and have been taken over or merged. Providing the liquidity to enable everyone to get out of a position anytime, even during the 1% when you wouldn't want to be the specialist for anything, is what you pay for the other 99% of the time when you give up the spread.
Jessie
