Spread
The spread is the gap between the price you can sell at (the bid) and the price you can buy at (the ask). A market maker buys at the bid and sells at the ask, keeping the small difference on every trade.
Paid per trade, not per move
A market maker earns a few cents on each trade, many times a day. A wrong bet on the price could wipe out months of that in one move, so it does not bet. Every option it sells leaves it exposed to the stock, and it cancels that exposure by buying or selling the stock itself: hedging. What is left is the spread.
Why this matters for Mellow
Because the goal is to stay neutral, not to be right, the hedging follows rules, not opinions. How much stock a market maker has to trade depends on the open options and the price, both of which are known. That makes the hedging possible to estimate in advance: gamma exposure, and from it the walls and the gamma flip.
Limits
- The spread is not their only income: exchange rebates and their own trading also count.
- Hedging is not perfect or continuous. Market makers adjust in steps and may stay partly exposed on purpose.
- Their real positions are not public. Mellow uses the standard industry assumption about which side they hold.