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Game Theory and Market Makers

Market makers provide liquidity to options markets. The buy the offer and they sell the bid. They serve the market to make sure things go smoothly.

Market makers want to remain delta neutral. To do so, they will buy and sell stocks based off the options that they buy and sell.

If a market maker sells a call option, they are negative delta, so they would buy stock to offset it.

If a market maker sells a put option, they are positive delta, so they would sell a stock to offset it.

Opposites are true if they buy said options.

Market makers demand higher premiums when stocks are moving more rapidly. Thus option premiums increase.

Spreads must always be maintained due to the maximum gain/loss cap associated with them.

How does the nature of the market maker and the design of the options contract make it possible to extract maximal profits?


Author: Trader Court

CPA first, pivoted to python programmer focused on data science which I apply to my own stock and options trading.

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