I'd like to understand the mechanics of options market making and how market makers manage their risks each day. It's been a matter of great curiosity for me and I think there's much to be learned by understanding this. I understand that this has all been computerized, but let's assume we're back in the old days and humans did this. Firstly, the job of setting the bid-ask spread at each strike. I assume the MMs use an options model of some sort to determine a fair price for the options. Anyone knows what model is used nowadays? Since IV is a derived value, how do you determine what value to use, say, when a new product with options just gets listed? What kind of algorithm or formula do MMs use to increase the IV (i.e price) when demand increases? Similarly, what formula is used when supply increases and IV decreases? How do MMs determine how far to set the bid-ask? Now about managing risk. Let's take a very simple example. I've just sold a couple of puts to a customer. I'm negative deltas so I immediately go short enough underlying to get roughly delta neutral. Although I'm roughly delta neutral for smallish moves, a large move will still offset my deltas because of gamma. What happens if a large move happens and I'm still left holding that short put? Do I keep hedging with the underlying? This put in my inventory also carries Vega risk. I assume they hedge it by buying options to balance this out? What if I want to buy, but no one's selling at my prices? Maybe we can start with this, thanks.