How Does a Market Maker “Flatten” Their Position on the Volatility Surface?
A market maker flattens their position by executing trades that reduce their net exposure across different points on the volatility surface. This means reducing net gamma and net vega exposure across various strikes and maturities.
They aim for a 'volatility-neutral' book by balancing long and short volatility exposures.
Glossar
Volatility Surface
Calibration ⎊ The volatility surface, within cryptocurrency options, represents a three-dimensional depiction of implied volatility indexed by strike price and expiration date; its calibration involves determining the parameters of a stochastic volatility model to best fit observed market prices of options contracts, a process crucial for accurate derivative pricing and risk assessment.
Market Maker
Genesis ⎊ The concept of a market maker within cryptocurrency derivatives, options trading, and broader financial derivatives fundamentally addresses liquidity provision and price discovery.
Net Vega Exposure
Metric ⎊ Net Vega Exposure is a critical risk metric representing the aggregate sensitivity of an entire options portfolio to a uniform one-unit change in implied volatility across all options.