How market makers hedge options (delta hedging)
By Faizan Ahmad. Updated .
Market makers hedge options mainly by delta hedging: after selling or buying an option, they trade enough of the underlying stock (or futures) to cancel the option's delta, so small price moves don't make or lose them money. Because delta changes as the price moves (that change is gamma), they keep re-hedging, buying or selling shares as the market moves. Their goal is to earn the bid-ask spread, not to bet on direction, and the combined re-hedging of all dealers is what gamma exposure (GEX) tries to estimate.
What is delta hedging?
Delta is how much an option's price moves for a $1 move in the stock, and it doubles as a share count: a call with a delta of 0.50 behaves like 50 shares per 100-share contract. A market maker who sells that call is short the equivalent of 50 shares, so it buys 50 shares to get back to flat.
SqueezeMetrics' GEX paper walks through the put version: a market maker who sells a 20-delta put to an investor short-sells about 20 shares to neutralize it. The market maker now doesn't care much whether the stock ticks up or down. It cares about the spread it collected and about how the hedge has to change.
Why does the hedge keep changing?
Delta isn't fixed. It moves with the stock, fastest for options near the money and close to expiration. That rate of change is gamma, and it's why hedging never stops.
Continuing SqueezeMetrics' example: if the stock falls and that put's delta grows from 20 to 50, the market maker must short 30 more shares to stay neutral. If the stock rises and the put's delta drops toward zero, it buys back the shares it shorted. Which way dealers trade depends on whether they are long or short gamma overall:
| Dealer position | Stock rises | Stock falls | Effect on the market |
|---|---|---|---|
| Long gamma (bought options) | Sells stock | Buys stock | Leans against moves |
| Short gamma (sold options) | Buys stock | Sells stock | Adds to moves |
That table, added up across every strike and every dealer, is the whole idea behind positive vs negative gamma.
A real example: the Nvidia block on October 30, 2026
At 11:55 AM ET, 52,800 Nvidia January 15, 2027 $180 calls traded as a single block for $172.81M, with NVDA at $205.81. Each contract covers 100 shares, so the trade carried exposure to 5.28 million shares, about $1.09B of stock at that price.
The calls were about $25.81 in the money, and deep in-the-money calls move much like the stock, so their delta is high. Whoever took the dealer side would hedge a large share of those 5.28 million shares right away, then keep adjusting as NVDA moved; it closed at $205.25, down 3.94%. Two things the tape can't tell you: which side the dealer was on, and whether the trade came paired with stock, which large blocks sometimes are. How to tell if a big options trade is a hedge covers how to read prints like this.
How often do market makers re-hedge?
- Not every tick. Hedging costs money, so desks hedge within bands: they let delta drift a bit before trading. SqueezeMetrics names this as one of the simplifying assumptions in GEX.
- The whole book, not each trade. A desk long calls at one strike and short calls at another nets them out and hedges what's left.
- With whatever is cheapest. Stock, futures (SPX options have no underlying shares, so they can be hedged with futures) or other options.
- Often into the close. Baltussen, Da, Lammers and Martens (2021) linked short-gamma hedging to momentum in the last 30 minutes of trading, consistent with dealers squaring hedges late in the day.
How do market makers make money if they're hedged?
Mainly from the bid-ask spread on high volume. The rest is a trade-off between gamma and theta (time decay):
- Short gamma desks collect time decay every day but lose on their hedges when the stock moves a lot, because they keep buying high and selling low.
- Long gamma desks pay time decay but profit from big moves, because rebalancing makes them sell high and buy low. Traders call that gamma scalping.
Implied volatility is the price of that trade-off. If the stock moves more than the option priced, long gamma wins; if less, short gamma wins.
Can market maker hedging move prices?
Sometimes, in aggregate. One desk's hedge is small. When the dealer community is short a lot of gamma near the price, everyone's hedges point the same way, and that's when hedging can feed a move, up to a gamma squeeze. Most of the time the effect is modest: Cboe found customer buying and selling in SPX 0DTE options so balanced that net market maker hedging was at most about 0.2% of SPX daily liquidity. Estimating the aggregate is the job of gamma exposure.
How to see it on Tradytics
On the options flow page, the side chip on each print hints at who traded with whom: Above ask, At ask and To ask mean the buyer paid up, so a market maker most likely sold and is the one hedging. The Dealer levels card on each options research page, such as NVDA options, shows the result in aggregate: estimated dealer gamma by strike and whether dealers are long or short gamma overall. Flow is live on Live and Pro; Free shows yesterday's session.
Common questions
Do market makers bet against retail traders?
Not in the directional sense. They take the other side of trades, then hedge away the direction and keep the spread. Their risk is big moves, not which way you lean.
Do market makers hedge every option trade?
They hedge their net book, not each trade, and only when delta drifts past their limits.
What is gamma scalping?
Holding long options and repeatedly rebalancing the delta hedge, selling stock on rallies and buying on dips, to earn back the time decay paid.
Can market makers push a stock to max pain?
Research on expiration days found closing prices cluster at strikes and pointed to hedge rebalancing and manipulation by firm proprietary traders as causes. That's a pull toward big strikes, not toward max pain specifically.
Sources
- SqueezeMetrics, Gamma Exposure (GEX), revised December 2017: the 20-delta put hedging example and hedging bands.
- Baltussen, Da, Lammers and Martens, Hedging Demand and Market Intraday Momentum (Journal of Financial Economics, 2021): short-gamma hedging and end-of-day momentum.
- Cboe, 0DTEs Decoded: Positioning, Trends, and Market Impact (May 2, 2025): net market maker 0DTE hedging at most about 0.2% of SPX daily liquidity.
- Ni, Pearson and Poteshman, Stock Price Clustering on Option Expiration Dates (2005): hedge rebalancing and manipulation as causes of strike clustering.
- SPY options traded $335.90M in premium on 2026-11-02: $193.59M in calls and $142.32M in puts, a net bullish lean of $32.03M.
- Put/call ratio 0.74.
- Options price a move of about ±$6.07 by 2026-11-02.
- Max pain for 2026-11-02 is $765.0.
Updated 2026-11-02 16:05 UTC