Market maker intraday hedging behavior

Dealers, or market makers, are the actual movers of price. The dealer holds inventory and must continually hedge their position in order to maintain a stable book. Contrary to what beginners think, successful options trading isn't about responding to news or predicting direction. It's about understanding how the dealers – the actual movers of the price – tend to behave.

Dealer behavior is most predictable on shorter timeframes. The most predictable piece of behavior I have observed both from running backtests and from simple observation is that since the 0DTE SPX era began in 2022, intraday volatility has meaningfully collapsed due to dealer hedging behavior. Dealers will generally pin the price within contained ranges as they balance their book. Most extreme realized volatility, when it does occur, tends to cluster in the direction of the trend rather than against it. That is the entire basis of the 8.0+ Sharpe strategy I devised for trading SPX 0DTE.

Instead of trying to explicitly map out the dealer positioning using the open interest and gamma exposure info, we can reasonably approximate it just by using an opening range high and low, which for dealers are key reference levels.