Risk-Free Futures Market Making by Hedging Long Straddle Options

Too Long; Didn't Read

A ‘long straddle’ is a way to hedge the risk of an exposed position generally by doing something in the opposite direction. In doing so, a price movement up or down will have the exact same effect on your position – where you’re losing fees and only fees. In reality, that’s no good because we don’t want to be losing on every trade :) But: if the price increases OR decreases a significant amount, one of those options expires in the money. This means that, while the market maker is performing within specifications and earning money from low price volatility, these options can expire worthless.