I think I’ve wrapped my head around how MMs hedge positions, but how do they de-hedge(unhedge?)?
As the delta falls on calls, they wouldn’t have to hold as many shares, but if delta’s falling the price must be going down. They wouldn’t sell for a loss, so what do they do?
The probably break even on the shares. They buy on the way up and sell on the way down. But you have to look at the bigger picture… They make money when people are buying options when the stock price peaks at/near the top. For example 25c for the 1/22 during the December run went up to $7.00 and a week later were basically worthless.
The spread on both stocks and options are where market makers generate a lot of their income. When a stock is moving aggressively though, market makers would tend to make more on the IV increases - since its in your favor to be a net seller when IV is high and a net buyer when IV is low.
For hedging, don’t forget that MMs ideally want to have a portfolio that is delta neutral because they don’t really care about direction so they may be setting up a counter to the trade when they are selling to open (to someone buying to open).
I’ve done a bit of reading on the subject, but more to do. Here’s some good material: Gamma - a Market Force Getting Stronger Than Ever
there’s also some good reddit discussions from actual market makers on what they do.