An approximate solution for options market-making in high dimension

TL;DR

This paper introduces a simple analytical approximation method for high-dimensional options market-making, addressing the complex challenge of managing diverse options inventories without relying on dimensionality reduction techniques.

Contribution

It presents a novel analytical approximation approach that enhances flexibility in options market-making strategies for high-dimensional problems.

Findings

Significantly higher flexibility in market-making strategies

Effective management of diverse options inventories

Improved solution approximation for complex financial problems

Abstract

Managing a book of options on several underlying involves controlling positions of several thousands of financial assets. It is one of the most challenging financial problems involving both pricing and microstructural modeling. An options market maker has to manage both long- and short-dated options having very different dynamics. In particular, short-dated options inventories cannot be managed as a part of an aggregated inventory, which prevents the use of dimensionality reduction techniques such as a factorial approach or first-order Greeks approximation. In this paper, we show that a simple analytical approximation of the solution of the market maker's problem provides significantly higher flexibility than the existing algorithms designing options market making strategies.