Dealer Hedging

Dealer hedging refers to the activities of market makers who provide liquidity by taking the other side of client trades. To remain market neutral, dealers must hedge the risks created by these client positions.

This involves buying or selling the underlying asset to balance their Delta, Gamma, and Vega exposures. Their hedging flows can significantly influence market price action, especially in the options market.

Understanding dealer hedging is crucial for anticipating market moves, as these flows are often mechanical and non-discretionary. It is a primary driver of price discovery in derivatives markets.