Do market makers hedge before or after options expire when selling options?

Discussion in 'Risk Management' started by Amatrue, Jan 29, 2021.

  1. jnbadger

    jnbadger

    Way off topic, but around a hundred years ago, I used to go to the Minneapolis Grain exchange on my lunch breaks and watch the action from the balcony. I applied for an internship and got it, but I turned it down for an internship on a MM desk. I'm not sure it matters, since I trade in my sweat pants at home, but to this day, I wish I had taken the job at the exchange. (I Don't know how the italics suddenly happened. I have a new gaming keyboard. And I'm supposed to be good at computers.)
     
    #11     Jan 29, 2021
  2. caroy

    caroy

    the last day....
     
    #12     Jan 29, 2021
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  3. caroy

    caroy



    When I taught high school economics over a decade ago we did a unit on futures trading. Set up our own mock pit, got new edge to donate jackets and the Lazarre trading cards, broadcast prices on the web to my trading friends who called in orders. Kids had a blast and learned about markets. It's funny I run into these kids all over town and this is probably one of the highlights they most remember from high school. Kids would even come back from college that week to try to defend their trading crown from year's past. School doesn't always have to suck.
     
    #13     Jan 29, 2021
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  4. jnbadger

    jnbadger

    That is fantastic. Teachers don't always have to suck, either. Good for you!

    Edit: I'm a bit biased because my mom was a reading teacher, and I think teachers are heroes. But I still think what you did was fantastic.
     
    Last edited: Jan 29, 2021
    #14     Jan 29, 2021
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  5. Amatrue

    Amatrue

    I'm asking this question because many DD done on wsb believes that when many call options expire ITM would trigger market makers to hedge and cause another rally in price. Is this true to any extent?
     
    #15     Mar 7, 2021
  6. Marker makers hedge continuously, so the answer is no, it does not matter if the options are OTM or ATM. The whole premise of short gamma squeezes depends on two factors -
    (a) MMs have to underprice volatility on these options - in this case the change in delta will be more violent
    (b) the change in delta has to be significant compare to ambient daily volume - in this case the flows from delta hedging will impact the underlying stock and create a feedback loop

    An expiration pin would be a very specific case - but even there, most MMs will hedge continuously up until the options expire.
     
    #16     Mar 7, 2021
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  7. Amatrue

    Amatrue

    Why do MMs need to hedge continuously up on an option when they would hedge the position immediately upon selling the option contract?
     
    #17     Mar 8, 2021
  8. MMs tend to be delta-neutral at all times. So as the underlying moves and options delta changes due to gamma, they buy or sell more underlying to keep themselves flat delta at a book level.
     
    #18     Mar 8, 2021
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