medium · Market Microstructure
An options market maker is 'net short gamma' on a large portfolio of call options they have sold to clients.
If the underlying stock price begins to fall rapidly, what must the market maker do to maintain a delta-neutral hedge, and what is the market impact?
- They must buy the underlying stock, stabilizing the market.
- They must hold their position until expiration to avoid 'pinning' risk.
- They must sell more options to offset the delta change; impact is minimal.
- They must sell the underlying stock, amplifying the price decline.
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