Market makers
Market makers are firms that quote a buy and a sell price for options all day and take the other side of most investor trades. They earn the gap between the two prices, not a bet on direction — so they hedge the risk away by trading the stock.
The other side of your trade
When an investor buys a put to protect a portfolio, someone has to sell it. Most of the time that is a market maker: a firm obliged by the exchange to keep quoting a bid (the price it pays) and an ask (the price it sells at). Its business is the small gap between them, earned many times a day.
Why they matter for the price
Selling an option leaves the market maker exposed to the stock's moves. To stay neutral it buys or sells the stock itself — hedging — and keeps adjusting as the price moves. With billions of dollars of options open, that adjusting is large enough to push the stock, in a direction that can be estimated from the open positions. That estimate is gamma exposure.
Limits
- Market makers' real positions are not public. Mellow uses the standard industry assumption about which side they hold.
- They also hedge with other options, futures and index products, so stock trades are only part of the picture.