Abstract
This paper builds a uni ed theoretical framework under which the quoting and hedging strategies of a competitive option market maker are analyzed. I show that the option market maker trades fewer shares of the underlying stock and widens the bid-ask spread as trading the underlying stock becomes more costly. Then I model the option market maker as being involved in more than one market within the same option chain. The market maker adjusts bid and ask quotes in multiple markets simultaneously to encourage transactions that help him/her easily hedge the inventory. This paper has potential implications in the recent debate over structural banking reform.
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