Do option market makers also hold stock for the options they write? Suppose it's a:

  • $10 billion company

  • $20 stock

  • 23 strike calls @ 30 cents

  • Buy 5000 calls

  • 10 days until expiration

I think this stock can move to 28 in 10 days. This would be a $4,000,000 loss to a market maker.

  • Will option market makers dump before 23 to make sure I don’t win?

  • How long and how much can they keep the stock down?

  • How many options need to be at a certain strike for them to say it’s better to sell all our stock than lose?

  • 1
    Market makers don't hold positions for long periods. What do you think market makers do that would create this loss? Why do you think they want to "keep the stock down"? – D Stanley Jan 24 '20 at 14:39
  • market makers can also hedge their risk – Michael Jan 24 '20 at 14:52
  • thank you - i thought market makers hold stock too long or short to help hedge their risk- i was thinking if you have a large enough call position they would lose money even if they hedged themselves with a farther strike- since longer duration options are expense- if they go just go 1 strike higher theres still a risk they lose the spread – Yoshi Onimusha Jan 24 '20 at 16:39

Your question lacks an understanding of how option market makers make a market. They are not a counterparty just sitting on the other side of you trade with the result that one of you wins and the other loses and in your example, to the tune of $4 million.

In addition, you are proposing that market makers are manipulating the market to screw you when you have a winning trade (eg. dump the stock to make sure that you don't win, etc.). It doesn't work that way.

Market makers hedge their risk. Read about delta neutral hedging.

Market makers have several ways to lay off the risk (conversions, reversals, box spreads, and other arb techniques). Here's an explanation of a conversion:

Suppose that you want to buy a $23 strike call. At the same time, I happen to want to sell the same series $23 strike put. Ignoring dividends (if any) and carry cost, the market maker takes the opposite side of each trade. He buys the put from me and sells the call to you while at the same time buying 100 shares, all done for a small credit.

The market maker has no risk because if the stock drops, he can exercise his put and sell his stock at $23. If the stock rises, it is called away at $23 via his short call. In this example, he doesn't care if the stock goes up or it goes down. He cares about pin risk but that's not germane to your question.

  • thanks for the detailed answer - is pin risk trying to pin the stock to a price before expiration? – Yoshi Onimusha Jan 24 '20 at 16:41
  • 1
    Billy Ray : Sounds to me like you guys a couple of bookies. Randolph Duke : [chuckling, patting Billy Ray on the back] I told you he'd understand. – JimmyJames Jan 24 '20 at 17:29
  • Pin risk occurs when the market price of the underlier of an option contract at the time of the contract's expiration is close to the option's strike price. In this situation, the underlier is said to have pinned. The risk to the writer (seller) of the option is that they cannot predict with certainty whether the option will be exercised or not. Read this – Bob Baerker Jan 24 '20 at 18:21

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