So I've been short selling Deep-in-the-Money, far from expiration Put Options on an ETF for about a year now, to profit from upward price movements on the underlying and time premium decay.
Volume for these contracts has been 0 this entire time, and Open Interest only shows my active positions. In other words, these contracts are extremely illiquid and it looks like I'm the only one trading them.
However, when I sell and buy the contracts, the orders are filled immediately and at a pretty fair price somewhere in the middle of the bid-ask spread.
So, my question is, who's buying my contracts on the other side of my order? Is it just a market maker? If so, why? Is it purely a legal requirement that comes with the job of being a market maker? Time decay and the underlying's price tendency to rise, translates into a bias for the contract to be worth less over time; is the market maker on the hook for these losses? The bid-ask spread is pretty wide to justify this risk for them, but since I'm getting fill prices somewhere in the middle of the bid-ask spread when I buy and sell, does the spread even matter?