medium · Market Microstructure
An options market maker is 'short gamma'. If the underlying stock price begins to rise rapidly, what action must the market maker take to remain delta-neutral?
- Buy more of the underlying stock, potentially amplifying the upward price move.
- Nothing, since gamma is unrelated to how delta shifts as price moves.
- Sell the underlying stock immediately to lock in the gain from the delta shift.
- Buy put options instead, offsetting directional risk without adjusting the stock position.
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