Do market makers in practice really hedge SPX and ES options in SPY or does the reverse occur often?
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Wonder if value traded here is a good metric. The reason being the true metric for setting price is the price impact, which I'm guessing differs per share/unit on ES/SPY.
No, they would have the same price impact (for a large enough order) since the mkt maker can hedge their SPY position with ES or vice versa — they are very closely related markets!
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For a small order you will probably trade more cheaply in SPY due to odd lots, pride improvement etc (although kind of moot since you can’t really do a “small order” in ES, min notional about $190k)
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Our desk always hedged the initial delta of SPX/SPY option immediately and we hedged in futures. The initial delta hedge was then rolled into an aggregate risk book to more efficiently hedge the banks gamma, etc, on a 24hr basis, and gamma hedging was done via futures.
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Did you always initially hedge in the front month and then do roll down or did you match months according to the option tenor?
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