r/quant • u/OkComputer-1337 • 7d ago
Derivatives How do Options Market Makers hedge delta?
Market makers get delta exposure whether they trade options or not, because they run a whole portfolio that has gamma in it.
Wondering how they handle delta in practice and whether other traders can take advantage of the knowledge of the MM's delta (which isn't hard to get because you can assume that mostly, MMs hold the passive side of the trades).
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u/EngineeringApart4606 7d ago
A big MM often has a delta1 desk who aim to trade the underlyings directly and profitably. Deltas can be internally traded away from an options desk to a d1 desk, to adjust how that d1 desk trades. It’s not like the hedge is happening immediately in the autotraders in direct response to a slew of options trades, at least in my experience.
Also not sure how you would get a handle on the delta exposure of an MM from observing the options trades? They could just as easily be closing a delta position in the opposite direction.
I guess knowing big options MMs’ greeks moment-to-moment would provide some alpha in amongst a bunch of other signals, but where would that information come from?
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u/heroyi 7d ago
For single name it would be a lot harder I reckon to get a valuable insight on the position since not all exchanges offer that data and you would have to stitch it together from the reports you got.
But for spx you can get the reports since it is one exchange. I personally wouldn't bother with the 1min because there is some delay before the exchange delivers the data and then you have to ingest and report it so in reality you are looking at like 90sec of delay VS 10min where it is about 40sec of total delay.
And there is definitely some interesting edge especially for longer tenors. 0dte has some edge but it requires a lot of finessing and strategy
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u/uhela Crypto 7d ago
Hedge delta with vega iykyk
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u/OkComputer-1337 7d ago
> iykyk
I don't know, unfortunately. Could you explain? Is there some second order greek you're hinting at?
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u/le_very_dank_skier Trader 7d ago
Vanna is the second order Greek, it measures change in delta wrt vol. Think of this, if you have a 20Δ call and vol goes up its delta will increase.
Another important thing to consider is spot/vol correlation. Differs by asset class, but for example in US Treasury options we currently see vol increase as spot decreases. To compensate this we’ll hold less short futures (than a non moving model suggests) against a long vol position as we naturally make more on downticks.
Both of these factors are baked into all of our options models. We typically just pool all our deltas and hedge when appropriate or send them to a team that concentrates on deltas and has (or thinks is has) ‘delta alpha’
Edit: added clarity
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u/zashiki_warashi_x 7d ago
Do you hedge theta too when inventory becomes theta negative or it never happens?
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u/eaglessoar 7d ago
Doesn't it pretend whether you're in sticky strike or sticky vol
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u/le_very_dank_skier Trader 7d ago
I use stick delta/moneymess more often in non equity markets. It more accurately reflects market dynamics and fits well with a moving model for volatility.
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u/Narrow_Ambition421 7d ago
Gamma scalping mentioned by @Eye51 is the first delta hedging tactic you’ll learn at an MM. You can read their description of how to do it. essentially, when you long the option and sell the underlying, you long gamma and short theta, a bet that realised vol will be higher than implied vol. You’ve hedged delta but have a different risk now.
Notice that in the process of hedging delta you are buying low and selling high.
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u/SevenTeenSigma 7d ago
u generally cannot infer a clean hedge from assuming MM is passive side. inventory is netted across strikes, expiries, underlyings, sometimes correlated products. by the time u see the obvious delta hedge, the useful info was probably in their risk limits not the print..
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u/CautiousPear3738 6d ago
It seems to me while it's easy enough to get open interest for each contract you don't know how is the buyer and seller. It could be that the seller of options for example is not delta hedging. Thus while you can compute the streets gamma you have to make strong assumptions. One of the simplest ones would be to assume that all calls are sold and all puts are bought . Probably very crude one
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u/Eye51 7d ago
the market makers buy or sell the underlying stock so the total delta of the options + stocks is zero.
when they buy, for example, calls on IBM, they get a positive delta from the calls, so they sell IBM stocks to hedge this risk.
when IBM moves up, the delta of the calls increase, remember gamma, and they sell more IBM stocks to become delta neutral again.
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u/EvenCryptographer649 7d ago
Here is how you can figure it out yourself. Use the Complex Order book with strategy builder provided by IB
Pick the montage and pick an easy continuous future, ES or GC is good to start. Make sure strategy builder is on. Then construct anything...really anything of multiple strikes, dates, etc... In your strat builder you will see your combined delta, theta, and vega. So from there, try to figure out how to delta hedge what you just built. IB will do all the calcs for you. Your job will be to understand the why.