A1216
Title: Option market makers
Authors: Antonia Kirilova - CUNEF Universidad (Spain) [presenting]
Dmitriy Muravyev - Michigan State University (United States)
Jianfeng Hu - Singapore Management University (Singapore)
Abstract: Option market makers (OMMs) are essential as they provide continuous two-sided quotes and facilitate most option trades. However, little is known about how they perform or manage risk. Unique account-level data for KOSPI 200 index options and futures is used to identify and study 43 OMMs. While OMM strategies are surprisingly heterogenous, they share several common features. First, OMMs are highly profitable and make money on most days. Second, although option investors are commonly believed to regularly delta-hedge in the underlying, only four out of 43 OMMs delta-hedge are found and their strategies are studied. Finally, OMMs quickly revert inventory positions to the desired level by providing liquidity with limit orders. Overall, OMMs primarily rely on active inventory management to manage risk.
