Options Market Makers
50 Pages Posted: 30 Nov 2023 Last revised: 24 Jul 2024
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: Suggested Citation