Market maker's delta-hedge illustrated (FRM T4-20)
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- เผยแพร่เมื่อ 6 มิ.ย. 2024
- [my xls is here trtl.bz/2O1OwKT] This market maker writes one call option (to the client) and hedges delta by purchasing Δ shares of the stock; this neutralizes delta but leave the market maker with a negative position gamma due to the short option position. The net profit, which is quantified in this video, on the position (i.e., short one call plus long one Δ share) is positive for short moves in the stock price but negative for large moves. There are four components to the market makers net gain/loss: interest received on cash from the short call, interest paid on the cash used to fund the purchase of the Δ share, positive theta (because time decay is a gain for the short option position!), and negative position gamma which overwhelms the other components as the magnitude of the stock movement (in either direction) increases. Discuss this video here in our FRM forum: trtl.bz/2JxHgqV
wow, this is probably the most insightful options hedging video i've seen. subscribed!
This is gold! Thank you for posting this.
Damn this helped me visualize and understand it very wel
Thank you so much for the visuals and breakdown! I have just started my studies in this area, and was wondering what the difference would be using the binomial pricing model, and could you also please explain the significance to MMs of 1 Delta? From what I have found thus far it appears to be the future price of the underlying. Awesome job, David, and thanks again!
thank you.
This is good info but represents only one side of the equation. The full picture for any MM is neutralizing calls AND puts not just calls. When the open interests of the calls and the puts are un-equal ATM and or shifted across strike prices this becomes a very interesting exercise for the MMs.
Crystal clear
Excellent!!! How does a change in IVol affect these calculations?
just wonder in what type of market movement would MM start to hedge their written calls with futures (eg. ES for SP500) vs SPY ETF shares for index types operation?
Here to make more sense of the Gamma squeeze on $GME haha
Another good one David. Thank you.
Thank you for the support!
I’m still learning so forgive me if my question is overly basic. When the stock price moves wouldn’t delta change so we’re no longer perfectly delta hedged? Does delta actually have a $0 impact or are you implying that the delta at the original point is hedged and the new delta created through gamma is the expense in the gamma column?
Yes, Market Maker will have to re-hedge their position, they can adjust day by day or week by week so long as they're in a comfortable zone of delta
how can MM hedge against whipsaw movement ? seem like MM can only hedge one direction but when the Underlying reverse creating a whipsaw movement . the MM is out of luck. Or is there a way MM can hedge when the underlying make a u-turn? my best guess is they dumping the shares so they can be delta neutral again? But when will they dump the shares? at what trigger point?
So taking this year last few months, with the high volatiliy of tech stocks , is it fair to assume that the MM were probably making loses?
Compensated by Vega?
How about dynamic delta hedge, how would loses be with that strategy?
10:30 very cool indeed
If only SellerOptions's James Cordier had seen your video beforehand....
Mitch Richard Cordier had no hedging in his hedge fund.
When the price moves up or down the Delta changes (of that specific call). If that is the case, wouldn't you say that the MM needs to keep adjusting its hedge for every $1 stock move? For example, if the stock moves up $1 and Delta went up too, they need to buy more stocks. If the price went down $1 the delta went down and they can sell the change back to the market.
Why do you think the majority of trading is automated? Mm delta hedging. MMs don't take losses, they simply adjust long/short exposure tick by tick to account for their short p/c positions.
Every high p/c environment ends in a short term spike eod while mm cover hedges as contracts close/expire
How can can the position delta be zero if the gamma is changing? Gamma affects delta no?
Do MM always hedge? Or do they keep track of winning and losing traders? I see Unusual options activity all the time but MM hedge only a small percentage of them. Why would that be?
"MM hedge only a small percentage of them" - how do you know this? "Unusual activity" on a particular strike may be partially hedged by the contracts on the other side of the option chain, i.e. puts if the UA is on calls. It is one massive, dynamic system that encompasses many inputs and outputs including the moneyness/delta of the strike. OTM contracts hedged less due to lower delta, etc.
I never get particularly excited about “unusual options activity” because you never know what’s really cooking and what the trader is intending with a particular play. Never ever look for confirmation bias in these types of activities either, you could very well end up misreading.
I thought gamma is greatest closest to the money, why is it then the MM delta increase as the stock price moves further from the money??
Why interest is divided by 250 but not 365 days a year?
That’s the number of trading days per year from what I gather.
surely 60shares not 0.6 shares - as 1contract is for 100 shares
nope, it's not illustrating a contract, it's just illustrating one option (I don't say contract anywhere). The one option can be scaled by any number
@@bionicturtle i was confused too... Thanks for clearing things up with this comment.
@@bionicturtle That is confusing but makes sense because the price of the call is also for one and not multiplied by 100.
How would you be possibly knowing which part of the open interest the MM is short or long? Because without that information you will never know their true exposure
Also there’s a retail investor making a NOPE index to roughly calculate the delta exposure of MM by using Vol times delta and summarizing all strikes with all expirations. Clearly it’s very misleading isn’t?
Time and sales on any particular day is usually a good indication of what was sold and bought, in line with price action can be a clue. Look for lot size as well.
this is called robbery 😂
My smooth ape brain no understand. Need sleep. Come back on a few try again.
Gme anyone ??
2:05