Market Making in the Options Markets and the Costs of Discrete Hedge Rebalancing

Mel Jameson and William Wilhelm

Journal of Finance, 1992, vol. 47, issue 2, 765-79

Abstract: In this paper, the authors provide empirical evidence consistent with the hypothesis that options market makers face risks in managing inventory that are unique to the options market. In particular, they show that risks associated with the inability to rebalance an option position continuously and uncertainty about the return volatility of the underlying stock each account for a statistically and economically significant proportion of the bid-ask spreads quoted for a sample of Chicago Board Options Exchange options. Copyright 1992 by American Finance Association.

Date: 1992
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