Automatic Delta Hedging

Less slippage, tighter markets

Market makers can use our HedgedVolOrder to essentially eliminate delta hedge slippage and be sure to trade options at the volatility level specified in their order. Optio's algorithmic trading engine can send hedge orders to spot venues for each partial fill received by a HedgedVolOrder.

Consider the following Volatility Levels in an Optio order book

ETH 1950 C - 15 days until expiration

Bid SizeBid VolatilityAsk VolatilityAsk Size

81.5%

510.2

62.3%

15

28.4

58.3%

19.45

59.0%

Consider that the 28.4 lot bid is a HedgedVolOrder-- if a 3 lot market sell order comes in to fill the bid, the following operations occur, in order:

  1. Upon notification of a 3 lot fill, compute the delta of the option filled.

    1. Assume an ETH underlying midpoint of 1850, with a volatility of 58.3%, the delta of this call 15 days out would be approximately 0.35 (see option pricing).

  2. Compute the hedge order size: 3.0 * 0.35 = 1.05

  3. Send a 1.05 lot SELL order of ETH to the hedging venue.

  4. When the hedge fill comes back, use the average price of this fill to "price" the option fill returned to the market order.

    1. Assume the 1.05 lots of ETH were sold for an average of 1849.75

    2. Price a 1950 call, 15 days out, with a vol of 58.3% and an underlying of 1849.75

      1. C = black_scholes(1849.75, 1950, 58.3%, 15/365) = 48.17

  5. The market maker is now long 3.0 ETH 1950 Calls at 58.3% vol (and a price of 48.17) with zero delta risk.

  6. The customer sold 3.0 ETH 1950 Calls for 48.17 which is an annualized yield of 48.17 / 1849.75 * 365/15 ~= 63.3% yield

Note that Optio makes the delta trade on behalf of the market maker, at the hedge venue of their choice.

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