{"paper":{"title":"Option market making with hedging-induced market impact","license":"http://creativecommons.org/licenses/by/4.0/","headline":"Option market makers' hedging trades generate permanent and transient impact on the underlying asset, coupling it to option order flow in a well-posed mixed control problem.","cross_cats":["math.PR"],"primary_cat":"q-fin.TR","authors_text":"Etienne Chevalier, Paulin Aubert, Vathana Ly Vath","submitted_at":"2025-11-04T12:13:44Z","abstract_excerpt":"This paper develops a model for option market making in which the hedging activity of the market maker generates price impact on the underlying asset. The option order flow is modeled by Cox processes, with intensities depending on the state of the underlying and on the market maker's quoted prices. The resulting dynamics combine stochastic option demand with both permanent and transient impact on the underlying, leading to a coupled evolution of inventory and price. We first study market manipulation and arbitrage phenomena that may arise from the feedback between option trading and underlyin"},"claims":{"count":4,"items":[{"kind":"strongest_claim","text":"The mixed control problem, which involves continuous quoting decisions and impulsive hedging actions, is well-posed; optimal strategies can be approximated numerically to illustrate the interplay between option market liquidity, inventory risk, and underlying impact.","source":"verdict.strongest_claim","status":"machine_extracted","claim_id":"C1","attestation":"unclaimed"},{"kind":"weakest_assumption","text":"Option order flow is modeled by Cox processes whose intensities depend on the state of the underlying asset and on the market maker's quoted prices, combined with both permanent and transient impact from hedging trades (as stated in the abstract description of the dynamics).","source":"verdict.weakest_assumption","status":"machine_extracted","claim_id":"C2","attestation":"unclaimed"},{"kind":"one_line_summary","text":"Develops a stochastic control model for option market making with hedging-induced impact on the underlying, analyzes manipulation and arbitrage risks, proves well-posedness of the mixed control problem, and numerically approximates optimal strategies via policy optimization.","source":"verdict.one_line_summary","status":"machine_extracted","claim_id":"C3","attestation":"unclaimed"},{"kind":"headline","text":"Option market makers' hedging trades generate permanent and transient impact on the underlying asset, coupling it to option order flow in a well-posed mixed control problem.","source":"verdict.pith_extraction.headline","status":"machine_extracted","claim_id":"C4","attestation":"unclaimed"}],"snapshot_sha256":"93aac552794a8c1346d10ee7b4ba5286d567d8526d0dff9d84d1202cb49953ee"},"source":{"id":"2511.02518","kind":"arxiv","version":2},"verdict":{"id":"c96b1fa1-cd70-4cf1-a672-6673df97d42c","model_set":{"reader":"grok-4.3"},"created_at":"2026-05-18T01:35:01.897911Z","strongest_claim":"The mixed control problem, which involves continuous quoting decisions and impulsive hedging actions, is well-posed; optimal strategies can be approximated numerically to illustrate the interplay between option market liquidity, inventory risk, and underlying impact.","one_line_summary":"Develops a stochastic control model for option market making with hedging-induced impact on the underlying, analyzes manipulation and arbitrage risks, proves well-posedness of the mixed control problem, and numerically approximates optimal strategies via policy optimization.","pipeline_version":"pith-pipeline@v0.9.0","weakest_assumption":"Option order flow is modeled by Cox processes whose intensities depend on the state of the underlying asset and on the market maker's quoted prices, combined with both permanent and transient impact from hedging trades (as stated in the abstract description of the dynamics).","pith_extraction_headline":"Option market makers' hedging trades generate permanent and transient impact on the underlying asset, coupling it to option order flow in a well-posed mixed control problem."},"integrity":{"clean":true,"summary":{"advisory":0,"critical":0,"by_detector":{},"informational":0},"endpoint":"/pith/2511.02518/integrity.json","findings":[],"available":true,"detectors_run":[],"snapshot_sha256":"c28c3603d3b5d939e8dc4c7e95fa8dfce3d595e45f758748cecf8e644a296938"},"references":{"count":16,"sample":[{"doi":"","year":2014,"title":"Optimal execution and price manipulations in time- varying limit order books","work_id":"f1adb164-5ec7-4946-8262-adf0f330b9c7","ref_index":1,"cited_arxiv_id":"","is_internal_anchor":false},{"doi":"","year":2016,"title":"Dynamic optimal execution in a mixed-market-impact Hawkes price model","work_id":"cf5eb711-562a-4a48-badc-8f96df0b6a1d","ref_index":2,"cited_arxiv_id":"","is_internal_anchor":false},{"doi":"10.21314/jor.2001.041","year":2001,"title":"Optimal execution of portfolio transactions","work_id":"ae02cc2b-33d0-46b4-b49a-4d9199b72d6c","ref_index":3,"cited_arxiv_id":"","is_internal_anchor":false},{"doi":"10.1080/14697680701381228","year":2008,"title":"High Frequency Trading in a Limit Order Book","work_id":"532f0d3a-94d7-4ebc-a936-1cce54b2b72c","ref_index":4,"cited_arxiv_id":"","is_internal_anchor":false},{"doi":"10.1080/14697688.2020.1766099","year":2021,"title":"Quantitative Finance , volume =","work_id":"59cfaccd-8812-4eff-b41e-d9f1aa2f5558","ref_index":5,"cited_arxiv_id":"","is_internal_anchor":false}],"resolved_work":16,"snapshot_sha256":"6b39987f1f3c8d610c4c4ae75d03f150d9f4742ed496f406dabed181ac79d5c4","internal_anchors":0},"formal_canon":{"evidence_count":2,"snapshot_sha256":"efcbaadba830110ec3db8f03d0e90493683c11ae9331800e761db4699e85c950"},"author_claims":{"count":0,"strong_count":0,"snapshot_sha256":"258153158e38e3291e3d48162225fcdb2d5a3ed65a07baac614ab91432fd4f57"},"builder_version":"pith-number-builder-2026-05-17-v1"}