Making Markets in Options
Everything so far has assumed you are quoting one instrument with one price. Most graduate traders at IMC, Optiver, SIG and Flow Traders are hired into options market making instead, which is the same business under four constraints that change it substantially.
1. You quote a surface, not a price
A single underlying carries dozens of strikes across several expiries, and you are expected to have a price on all of them at once.
They are not independent. A change in your view of the underlying moves every one of them, and the smile and term structure constrain how they may move relative to each other. Quote one strike out of line with its neighbours and you have not offered an attractive price, you have offered an arbitrage.
So the object being maintained is a surface, fitted to whatever the market is showing and to your own view, and each quote is read off it. The competitive question stops being "where is fair value" and becomes "whose surface is better".
2. You quote in volatility, not in currency
Prices are agreed in implied vol and converted to premium at the point of trade. This is not a convention for its own sake: it strips out the four observable inputs and leaves the one thing anyone disagrees about.
The practical effect is that your quote stays live while the underlying moves. A price in currency would be stale in seconds; a price in vol is still meaningful, with the delta hedge handling the rest. It is why an options market can function at all with so many instruments to keep current.
3. Only one dimension of your inventory is cheap to hedge
This is the real difficulty, and it is what separates the job from quoting an equity.
A stock market maker's inventory is one number, and it is neutralised by trading the stock. An options book has several exposures at once, and they are not equally tractable.
| Exposure | What it is | How you hedge it |
|---|---|---|
| Delta | Direction | The underlying: liquid, cheap, continuous |
| Gamma | How delta moves | Only with other options |
| Vega | The level of implied vol | Only with other options |
| Skew and term structure | The shape of the surface | Only with the right other options |
Delta is the easy one, and it is the one most people think of. The rest can only be offset by trading more options, which brings its own delta and gamma along with it. Hedging is therefore a simultaneous problem rather than a sequence of independent fixes, and a book is never fully flat: it is flat in delta and within limits everywhere else.
An equity market maker manages a position. An options market maker manages a vector. Only its first component has a cheap hedge, which is why the inventory problem is qualitatively harder rather than just larger.
4. The edge is in the volatility, not in the spread
For a linear instrument, expected P&L is fill rate times profit per fill. Options add a second, larger term.
A delta-hedged option position earns from rebalancing as the underlying moves and pays theta for the privilege. Over the life of the trade the two net out to a bet on realised volatility against the implied volatility you traded at:
The second term usually dominates. You can capture spread on every trade all week and still lose, because the market moved less than the vol you sold. Being right about volatility matters more than being tight.
Adverse selection has a sharper edge here
The general problem is worse in options for a specific reason: the instruments are precise enough to express private information exactly.
Someone who knows a deal is coming does not buy the stock, which is conspicuous and capital-intensive. They buy short-dated out-of-the-money calls, which are cheap, leveraged and paid enormously if they are right. The flow that arrives on your least liquid strikes is therefore the flow most likely to know something, and it arrives in the strikes where you have the least information to price with.
This is adverse selection with an unusually high : the distance between outcomes is large, so the spread that survives it is wide. It is why the wings trade wider than the at-the-money in ways no model fully explains, and why a sudden run of interest in one far strike is treated as information rather than as flow.
"Someone lifts your offer in a far out-of-the-money call. What do you do?" The expected answer is not to requote mechanically. It is to ask why anyone wants that strike, to widen the wing, and to check what else on your surface would be wrong if they are right.
Why firms hire graduates into it
It compresses a great deal of learning into a short period. You get pricing, hedging, probability and risk management in one seat, the feedback arrives daily, and the skills are the ones the interview already tests: fast arithmetic, comfort with distributions, and composure when a position moves.
It is also where the revenue is. Options are harder to price than the underlying, which is exactly why pricing them well is worth something.