Market maker delta hedging

Discussion in 'Options' started by clearinghouse, Mar 5, 2012.

  1. My understanding is that it used to be the case that options market makers would hedge their delta almost immediately whenever they got hit on the market. If they no longer do this immediately, then what sort of calculations are involved in terms of determining how long to hold the contracts for which they got hit?

    Is it just sort of some short-term VaR, + some level of confidence in terms of how likely they'd be able to just make the spread instead?
     
  2. rmorse

    rmorse Sponsor

    It would be based on their strategy, risk tolerance and trading style. No set rule.
     
  3. Perhaps I should've phrased it better. What are the general variables they look at when they are modeling whether or not to hold a given piece of inventory without deciding to delta hedge?
     
  4. rmorse

    rmorse Sponsor

    When a MM is monitoring a basket of option names, they will watch individual deltas, total delta (Some watch dollar delta, so AAPL delta is given more weight than GE deltas) Individual Vega and total Vega, and Individual Theta and total theta. Some traders will have a bias. Some won't. If I like to lean long Theta, and I get long, I will either just my values to only sell, or go out and balance my portfolio.

    There really is no absolute answer here. I've meet traders that never hedge during the day, only at the close.

    Sorry,

    Bob