This article is part of a more broad series of research questions I address regarding Gamma Exposure. Check out this post for more.
An options market maker is an individual (or more likely institution) that has a contractual relationship with an exchange, like the CBOE (Chicago Board Options Exchange) to ensure there is liquidity in the options market.
When you trade options, the person on the other side of your trade is generally going to be a market maker. They are the people who make it so that you can more easily buy or sell an option contract at some strike on some expiration date.
Market makers ensure that transactions are completed quickly in the options market even where there doesn’t seem to be a buyer or a seller. Transactions would be harder to conduct, and options trading may not be as commonplace.
What is the motive of the options market maker? How do they make money?
Market makers can make profits on almost every trade. The way that they can do this is by buying the offer and selling the bid, and maintaining what’s called a bid-ask spread.
Market makers benefit from spread between the bid and the ask since they are the buyer or seller when they need to be.
For this reason, once market makers build up a large book of options, they must continuously monitor their portfolios and hedge against risks that could make them end up losing money in the long run. This ultimately has a huge impact on the S&P 500 index.
This is why the Greeks are so important to market makers and can help them protect themselves by hedging theirs portfolio of options against those different risks.