15 lines
1001 B
Plaintext
15 lines
1001 B
Plaintext
Hedging the Risk
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Delta is the easiest risk for floor traders to eliminate quickly. It becomes
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second nature for veteran floor traders to immediately hedge nearly every
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trade with the underlying. Remember, these liquidity providers are in the
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business of buying option bids and selling option offers, not speculating on
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direction.
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The next hurdle is to trade out of the option-centric risk. This means that
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if the market maker is long gamma, he needs to sell options; if he’s short
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gamma, he needs to buy some. Same with theta and vega. Market makers
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move their bids and offers to avoid being saddled with too much gamma,
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theta, and vega risk. Experienced floor traders are good at managing option
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risk by not biting off more than they can chew. They strive to never buy or
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sell more options than they can spread off by selling or buying other
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options. This breed of trader specializes in trading the spread and managing
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risk, not in predicting the future. They’re market makers, not market takers. |