Options Market Makers

42 Pages Posted: 30 Nov 2023

See all articles by Jianfeng Hu

Jianfeng Hu

Singapore Management University - Lee Kong Chian School of Business

Antonia Kirilova

CUNEF Universidad

Dmitriy Muravyev

Michigan State University - Department of Finance; Canadian Derivatives Institute

Date Written: April 1, 2023


Options market makers (OMMs) are essential as they provide continuous two-sided quotes and facilitate most option trades. However, little is known about how they perform or manage risk. We use unique account-level data for KOSPI 200 index options and futures to identify and study 43 OMMs. While OMMs’ strategies are surprisingly heterogeneous, they share several common features. First, OMMs are highly profitable and make money on most days. Second, although option investors are commonly believed to regularly delta-hedge in the underlying, we find that only four out of 43 OMMs delta-hedge and study delta-hedgers’ strategies. Finally, OMMs quickly revert inventory positions to the desired level by providing liquidity with limit orders. Overall, OMMs primarily rely on active inventory rebalancing to manage risk.

Keywords: Options market makers, liquidity, delta-hedging, risk management

JEL Classification: G12, G13, G14

Suggested Citation

Hu, Jianfeng and Kirilova, Antonia and Muravyev, Dmitriy, Options Market Makers (April 1, 2023). Available at SSRN: https://ssrn.com/abstract=4633451 or http://dx.doi.org/10.2139/ssrn.4633451

Jianfeng Hu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
(+65) 68085477 (Phone)

Antonia Kirilova

CUNEF Universidad ( email )

Calle de los Pirineos, 55
Madrid, 28040

Dmitriy Muravyev (Contact Author)

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Canadian Derivatives Institute ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics