Option market makers take whatever side of the trade customers bring them. The popular story says they then have to hedge that book back to delta neutral, so their stock trades follow the price mechanically, and near expiry they pin prices to strikes with large open interest. If that hedging is compulsory, someone is trading on a rule rather than a view, and that flow should be predictable.
forced flow / options market making
Option dealer gamma hedging
The idea
How it was tested
No backtest, and none was possible: it would need options open interest by strike, which the lab only has live, with no history. The entry test came first anyway. It asked for the sentence, in a rule or a filing, that binds a dealer to stay delta neutral.
As weak corroboration, the lab counted phrases in 10-K filings from 2024-2026: how often firms describe delta neutrality as a requirement, and how often they describe hedging as something that can fail.
Where it died
Rejected on 2026-09-20. No such sentence exists. A market maker sets its own risk limits, its own hedging frequency and its own tolerance band. It can widen spreads and it can turn flow away. Hedging is a preference, and a profitable one, but not a duty.
The filings point the same way, and the lab presents them only as weak support: "delta neutral" appears in 1 filing, "may not be able to hedge" in 62. Firms disclose hedging as a risk that can go wrong, not an obligation they must meet. The contrast that settled it is a leveraged position liquidated by an exchange without asking the trader. That is what being forced looks like, and a dealer's hedge is not it.
The record
Thesis
Option market makers must stay delta-neutral against a book they did not choose, so their hedging trades mechanically in the direction of spot, pinning prices near strikes with large open interest into expiry.
Gates
Entry test — obligationfail
Is someone actually obliged to trade badly here, and unable to stop?
Why it died
Nothing compels delta neutrality. A market maker sets its own risk limits, hedging frequency and tolerance band, can widen spreads and can decline flow: hedging is a risk-management preference — a profitable one — not an obligation. Weak corroboration, offered as weak: across 10-K filings 2024-2026, "delta neutral" appears in 1 filing and "may not be able to hedge" in 62 — firms disclose hedging as something that can fail, not something they are bound to achieve.
What it taught
Compare a liquidated leveraged position, closed by the exchange without the trader being consulted: that is what an obligation looks like. The entry would be worth reopening only if a dealer were shown to be bound by a hard external constraint — a clearing-house margin rule or a regulatory capital charge that bites at a known threshold.
Verdict history
- 2026-09-20Rejected at the entry test — hedging is internal policy, not an obligation Rejected before testing