How Do Market Makers Hedge Their Options Positions?
Market makers primarily use delta hedging, which involves buying or selling the underlying asset (stock, crypto, or future) to keep their overall portfolio's delta (price sensitivity) close to zero. This neutralizes the risk from small price movements in the underlying asset.
They constantly adjust their hedge as the underlying price changes (dynamic hedging) and use other Greeks like Gamma and Vega to manage more complex risks.
Glossar
Market Makers
Function ⎊ Market Makers in cryptocurrency, options, and derivatives markets actively provide liquidity by simultaneously offering to buy and sell assets, narrowing bid-ask spreads and facilitating efficient price discovery.
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.