An approximate solution for options market-making in high dimension

Bastien Baldacci, Joffrey Derchu and Iuliia Manziuk

Papers from arXiv.org

Abstract: Managing a book of options on several underlying involves controlling positions of several thousands of financial assets. It is one of the most challenging financial problems involving both pricing and microstructural modeling. An options market maker has to manage both long- and short-dated options having very different dynamics. In particular, short-dated options inventories cannot be managed as a part of an aggregated inventory, which prevents the use of dimensionality reduction techniques such as a factorial approach or first-order Greeks approximation. In this paper, we show that a simple analytical approximation of the solution of the market maker's problem provides significantly higher flexibility than the existing algorithms designing options market making strategies.

Date: 2020-09
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