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Option market making under inventory risk

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  • Sasha Stoikov
  • Mehmet Sağlam

Abstract

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Suggested Citation

  • Sasha Stoikov & Mehmet Sağlam, 2009. "Option market making under inventory risk," Review of Derivatives Research, Springer, vol. 12(1), pages 55-79, April.
    • Handle: RePEc:kap:revdev:v:12:y:2009:i:1:p:55-79
    DOI: 10.1007/s11147-009-9036-3
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    References listed on IDEAS

    as
    1. Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
    2. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009. "Demand-Based Option Pricing," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
    3. Ho, Thomas S Y & Macris, Richard G, 1984. "Dealer Bid-Ask Quotes and Transaction Prices: An Empirical Study of Some AMEX Options," Journal of Finance, American Finance Association, vol. 39(1), pages 23-45, March.
    4. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March.
    5. Robert Engle & Robert Ferstenberg, 2006. "Execution Risk," NBER Working Papers 12165, National Bureau of Economic Research, Inc.
    6. Boyle, Phelim P. & Emanuel, David, 1980. "Discretely adjusted option hedges," Journal of Financial Economics, Elsevier, vol. 8(3), pages 259-282, September.
    7. Jameson, Mel & Wilhelm, William, 1992. "Market Making in the Options Markets and the Costs of Discrete Hedge Rebalancing," Journal of Finance, American Finance Association, vol. 47(2), pages 765-779, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. René Carmona & Kevin Webster, 2019. "The self-financing equation in limit order book markets," Finance and Stochastics, Springer, vol. 23(3), pages 729-759, July.
    2. Bastien Baldacci & Philippe Bergault & Olivier Gu'eant, 2019. "Algorithmic market making for options," Papers 1907.12433, arXiv.org, revised Jul 2020.
    3. Wang, Xinjie & Zhong, Zhaodong (Ken), 2022. "Dealer inventory, pricing, and liquidity in the OTC derivatives markets: Evidence from index CDSs," Journal of Financial Markets, Elsevier, vol. 57(C).
    4. Qing-Qing Yang & Wai-Ki Ching & Jiawen Gu & Tak-Kuen Siu, 2020. "Trading strategy with stochastic volatility in a limit order book market," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 43(1), pages 277-301, June.
    5. Bastien Baldacci, 2020. "High-frequency dynamics of the implied volatility surface," Papers 2012.10875, arXiv.org.
    6. Philippe Bergault & Olivier Guéant, 2021. "Size matters for OTC market makers: General results and dimensionality reduction techniques," Mathematical Finance, Wiley Blackwell, vol. 31(1), pages 279-322, January.
    7. Bastien Baldacci & Iuliia Manziuk, 2020. "Adaptive trading strategies across liquidity pools," Papers 2008.07807, arXiv.org.
    8. Olivier Guéant, 2016. "The Financial Mathematics of Market Liquidity: From Optimal Execution to Market Making," Post-Print hal-01393136, HAL.
    9. Kan Huang & David Simchi-Levi & Miao Song, 2012. "Optimal Market-Making with Risk Aversion," Operations Research, INFORMS, vol. 60(3), pages 541-565, June.
    10. Wang, Xinjie & (Ken) Zhong, Zhaodong, 2022. "Post-crisis regulations, market making, and liquidity in over-the-counter markets," Journal of Banking & Finance, Elsevier, vol. 134(C).
    11. Rene Carmona & Kevin Webster, 2013. "The Self-Financing Equation in High Frequency Markets," Papers 1312.2302, arXiv.org.
    12. Entrop, Oliver & Fischer, Georg, 2019. "Hedging costs and joint determinants of premiums and spreads in structured financial products," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-34-19, University of Passau, Faculty of Business and Economics.
    13. Oliver Entrop & Georg Fischer, 2020. "Hedging costs and joint determinants of premiums and spreads in structured financial products," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(7), pages 1049-1071, July.
    14. Philippe Bergault & Olivier Gu'eant, 2019. "Size matters for OTC market makers: general results and dimensionality reduction techniques," Papers 1907.01225, arXiv.org, revised Sep 2022.
    15. Stewart Hodges & Hao Lin & Lan Liu, 2013. "Fixed Odds Bookmaking with Stochastic Betting Demands," European Financial Management, European Financial Management Association, vol. 19(2), pages 399-417, March.
    16. Fabien Guilbaud & Huyen Pham, 2011. "Optimal High Frequency Trading with limit and market orders," Working Papers hal-00603385, HAL.
    17. Wujiang Lou, 2015. "Extending the Black-Scholes Option Pricing Theory to Account for an Option Market Maker's Funding Costs," Papers 1510.04370, arXiv.org.
    18. Philippe Bergault & David Evangelista & Olivier Gu'eant & Douglas Vieira, 2018. "Closed-form approximations in multi-asset market making," Papers 1810.04383, arXiv.org, revised Sep 2022.
    19. Bastien Baldacci & Joffrey Derchu & Iuliia Manziuk, 2020. "An approximate solution for options market-making in high dimension," Papers 2009.00907, arXiv.org.
    20. Rene Carmona & Kevin Webster, 2019. "Applications of a New Self-Financing Equation," Papers 1905.04137, arXiv.org.
    21. Fabien Guilbaud & Huyen Pham, 2011. "Optimal High Frequency Trading with limit and market orders," Papers 1106.5040, arXiv.org.
    22. Wu, Wei-Shao & Liu, Yu-Jane & Lee, Yi-Tsung & Fok, Robert C.W., 2014. "Hedging costs, liquidity, and inventory management: The evidence from option market makers," Journal of Financial Markets, Elsevier, vol. 18(C), pages 25-48.
    23. Zhou Fang & Haiqing Xu, 2023. "Market Making of Options via Reinforcement Learning," Papers 2307.01814, arXiv.org.

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    More about this item

    Keywords

    Delta; European options; Gamma; Inventory management; Liquidity; Market microstructure; Vega; G13; G11; C61;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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