How Do LPs Manage Inventory Risk When Responding to an RFQ for a Large Options Block? ▴ Learn

How Do LPs Manage Inventory Risk When Responding to an RFQ for a Large Options Block?

Liquidity Providers (LPs) manage inventory risk, or the risk of holding an undesirable position, by dynamically hedging the resulting options position immediately upon execution. They use models to calculate the Greeks (Delta, Gamma, Vega) of the trade and execute offsetting trades in the underlying asset or other derivatives.

The price quoted in the RFQ incorporates a premium to cover this hedging cost and execution risk.

How Does ‘Delta Hedging’ Help a Market Maker Mitigate the Inventory Risk of an Options Position?

How Does an LP Manage the Directional Risk Acquired from an RFQ Trade?

How Does the ‘Greeks’ Help a Market Maker Manage Inventory Risk?

How Does an OTC Desk Manage Inventory Risk When Acting as a Principal in a Block Trade?