2020/09/02 by Bastien Baldacci, Baldacci, Bastien, Joffrey Derchu +3
Decision Sciences · Economics, Econometrics and Finance · Physics and Astronomy · #FOS: Economics and business #Mathematical Finance (q-fin.MF) #Model Reduction and Neural Networks #Probabilistic and Robust Engineering Design #Stochastic processes and financial applications #Trading and Market Microstructure (q-fin.TR)
paper · pdf · doi:10.48550/arxiv.2009.00907
openalex publication_date 2020/09/02 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
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.