Options Market Makers

50 Pages Posted: 30 Nov 2023 Last revised: 24 Jul 2024

See all articles by Jianfeng Hu

Jianfeng Hu

Singapore Management University - Lee Kong Chian School of Business

Antonia Kirilova

CUNEF Universidad

Dmitriy Muravyev

University of Illinois at Urbana-Champaign - Department of Finance; Canadian Derivatives Institute

Doojin Ryu

Sungkyunkwan University

Date Written: April 1, 2023

Abstract

Options market makers (OMMs) are essential as they provide continuous two-sided quotes and facilitate most option trades. However, very little is known about how they perform and manage risk. Utilizing unique account-level data for KOSPI 200 index options and futures, we conduct the first direct study of individual OMMs. Their strategies, while diverse, share several commonalities. OMMs earn significant and consistent profits. Contrary to the prevalent assumption that delta-hedging in the underlying market is the primary method for mitigating option risks, only four out of 43 OMMs in our sample delta-hedge. Instead, OMMs mainly mitigate risk through active inventory rebalancing.

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

JEL Classification: G12, G13, G14

Suggested Citation

Hu, Jianfeng and Kirilova, Antonia and Muravyev, Dmitriy and Ryu, Doojin, 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
Singapore
(+65) 68085477 (Phone)

Antonia Kirilova

CUNEF Universidad ( email )

Calle de los Pirineos, 55
Madrid, 28040
Spain

Dmitriy Muravyev (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-7213772 (Phone)

Canadian Derivatives Institute ( email )

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

Doojin Ryu

Sungkyunkwan University ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

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