The Risk Management Of Option Market Maker

Since the introduction of stock option trading in 1974 and futures option trading in 1982,,the total volume of option trading on all exchanges and over the counter markets in the United States is now billions of dollars a day. By introducing the stock index futures in 2010 and 50 ETF option in 2015, China is following the growth path of the mature markets overseas, promising that option markets will become one of the most important sectors of internal financial industry.The first choice it has to make is the introduction of the trade mechanism. Compared with call-auction system, China’s internal exchanges are tending to adopt the market-maker system. Unfortunately, there are few books, if any, exclusively address option market making. Therefore, this dissertation tries to carry out some beneficial exploration in this respect.The dissertation includes four chapters. The first two chapters provide a briefly overview of economic functions of option and review option basics and strategies. Chapter three discusses the economics of market making from the perspective of its characteristics and its function in the option market and simultaneously addresses the management of credit risk, liquidity risk, position risk and pin risk etc. through the analysis of risks on its own by using the methods of VaR and statistical analysis and combining empirical and normative analysis.It is shown that the market makers can reduce their position risk through adjusting the Greeks and have a control of the total risk by using VaR and SPAN system. They could also exploit the internal trading in themselves to arbitrage their positions. The Last Chapter is about some creations and suggestions for further explorations.