2.3.1 Aggregate Portfolio Exposure Overview

The aggregate portfolio exposure dictates the overall risk a single portfolio must manage. For example, if a portfolio is short a SPY call at $600 with 0.5 delta and short a SPY call at $605 with 0.3 delta, then that portfolio has an aggregate delta exposure of -0.8 delta. This means the expectation at that point in time is that the portfolio will have to deliver 80 shares of SPY at expiration and receive $48,150. Portfolio exposure can be quantified for any option Greek, and strategies exist to hedge or manage that risk.

A key observation about the options market is that because market makers are the middle man between all trades, and work to systematically reduce their exposure risk on the aggregate portfolio of options they own, then knowing their position means you can anticipate their market actions. Essentially, if we know the volume and price of every trade, as well as if those traded options were opened or closed and bought from a market maker or sold to a market maker, we could perfectly recreate the aggregate portfolio exposure of the market makers and predict their future hedging activities. This transparency into the market maker books would create significant vulnerabilities which could be exploited for profit, and so some of the information required to recreate this portfolio is delayed or hidden from most market participants. We discuss them below.