YouTube T4-19: Hedging (aka, neutralizing) option delta and gamma

Nicole Seaman

Director of CFA & FRM Operations
Staff member
To hedge options Greeks, we want to rely on the formula: +/- Quantity * %Greek = Position Greek, where a short position is represented by negative quantity. In this example, the market maker writes 10,000 ATM call options, each with percentage (per option) delta of 0.550 and gamma of 0.0440. This creates -10,000 * 0.550 = -5,500 position delta and -10,000 * 0.04400 = -440 position gamma. To neutralize (fully hedge) the gamma, the market maker buys OTM 12,055 call options, each with percentage delta of 0.270 and percentage gamma of 0.03650, which has position delta of 12,055 * 0.270 = +3,250 and position gamma of 12,055 * 0.03650 = +440. Due to -440 + 440, position gamma is now neutralized. However, position delta is -5,500 + 3,255 = -2,245 such that the market maker buys 2,245 shares (shares have 1.0 percentage delta and zero percentage gamma) and with that trade, both delta and gamma are neutralized.

David's XLS is here:

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New Member
Hi there!

I have been really enjoying your videos having just become interested in the dynamics of the options market and particularly hedging and operations of market makers.

I would like to ask a question about this video. In terms of looking at an option chain would position mean open interest?

If I wanted to look at where a market maker is likely to experience maximum pain/carry maximum exposure, would a way to locate this be calculate strike prices with highest oi*delta and/or oi*gamma?

Thank you for your answer and apologies if I am getting any terminology mixed up!!

Thank you,