How Market Makers Hedge
Understanding the other side of your trade
Who Are Market Makers?
Market makers are firms that provide liquidity by always being willing to buy and sell options. When you buy a call, a market maker is often on the other side selling it to you. They profit from the bid-ask spread, not from directional bets. To avoid taking directional risk, they continuously hedge their positions.
Delta Hedging
When a market maker sells you a call with a delta of 0.50, they immediately buy 50 shares of the underlying stock to stay delta-neutral. As the stock moves and delta changes, they adjust their hedge — buying more shares as the stock rises and selling shares as it falls. This constant rebalancing is called delta hedging.
The Impact on Markets
Dealer hedging creates real supply and demand in the stock market. When dealers are long gamma (positive GEX), their hedging dampens volatility. When they are short gamma (negative GEX), their hedging amplifies moves. Understanding this flow gives you insight into why stocks sometimes pin at certain levels or suddenly break out.
Key Terms
Market Maker — A firm that provides liquidity by quoting both buy and sell prices
Delta Neutral — A position with no net directional exposure
Delta Hedging — Continuously adjusting stock holdings to maintain delta neutrality
Liquidity — The ease with which an asset can be bought or sold without impacting price