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Screen 7:  Hedging

Modern option pricing theory has provided a rich set of tools to market-makers in option who attempt to earn the bid/ask spread.  These traders face a number of risks because order flow occurs irregularly overtime.  That is, it is rare that a market-maker can post a bid/ask spread and be hit with identical orders simultaneously on both sides of the spread.

In other words, to earn the spread a market-maker at any point in time faces multiple sources of risk.  First, they may buy at their posted bid only to find that, by the time they sell the same quantity, their posted ask has changed.  Thus, successful hedging of residual market-making activities is an important driver of market-making profit performance.

Successful hedging of an options book requires knowledge of the Greeks (delta, gamma, vega, theta and rho).  

This current hedging module provides a powerful analytical support system for computing position hedge ratios from current option prices for a position consisting of both options and the underlying asset.

OS Financial Trading System, PO Box 11356, Pittsburgh, PA 15238 USA, Phone 1-800-967-9897, Fax 1-412-967-5958, Email fts@ftsweb.com,

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