How Do Market Makers Use Different Moneyness Options to Manage Their Risk?

Market makers, who provide liquidity by buying and selling options, use options of different moneyness to maintain a risk-neutral portfolio. Their goal is to profit from the bid-ask spread, not from the direction of the market.

They use a process called delta hedging, where they buy or sell the underlying asset to offset the directional risk (delta) of their options positions. By trading a variety of ITM, ATM, and OTM options, they can also manage their exposure to changes in volatility (vega) and time decay (theta), ensuring their overall position remains balanced.