Market Maker Delta Hedging

Market maker delta hedging is the specific practice of managing the delta exposure of an options book to remain market neutral. When market makers sell options, they acquire delta exposure that must be hedged to avoid directional risk.

They do this by buying or selling the underlying asset in quantities dictated by the option delta. This process creates a predictable flow of orders that can influence the underlying price.

For instance, if market makers are short calls, they must buy the underlying asset as the price rises to maintain their hedge. This creates a positive feedback loop that can drive prices higher.

Conversely, if they are short puts, they may need to sell the underlying asset as the price falls, which can exacerbate downward moves. Understanding this mechanism is crucial for anticipating market movements around significant option expiry dates.

It is a core element of how derivatives markets impact the spot market.