Options Market Makers

Abstract

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