Market Making and Risk Management in Options Markets

46 Pages Posted: 1 Apr 2015

Date Written: March 30, 2015

Abstract

This article examines the personal trading strategies of member proprietary traders in the natural gas futures options market. Trading activity is found to mirror previous findings in futures markets, specifically high frequency trading, with low risk exposure. The portfolio of risk holdings by member proprietary traders are also examined to identify whether they are instantaneously hedged using the underlying futures market, as well as to investigate how they manage their inventory holding, rebalancing, and volatility risk exposures. Findings of longer-term risk management practices by option markets indicate that instantaneous hedging does not take place in this market. Exposure to price and volatility risks is actively managed, while rebalancing risk exposure has a significant impact on profit for this trading group.

Keywords: Market making, risk management, options, futures

JEL Classification: G13

Suggested Citation

Boyd, Naomi E., Market Making and Risk Management in Options Markets (March 30, 2015). Review of Derivatives Research, Vol. 18, No. 1, 2015, Available at SSRN: https://ssrn.com/abstract=2587282

Naomi E. Boyd (Contact Author)

West Virginia University ( email )

PO Box 6025
Morgantown, WV 26506
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
932
Abstract Views
2,788
Rank
46,344
PlumX Metrics