An options market maker is an individual, or a large financial institution, that has a contractual relationship with an exchange, such as the Chicago Board Options Exchange.
Market makers ensure a certain level of liquidity in the options market to keep trading running efficiently. It is not necessary to understand what market makers do if you are an investor in options, unless you aspire to work for a financial institution in that line of work.
However, it is useful to investors to understand why they exist and the effect they have on the options market. This article will provide that useful information.
Market makers have large and diverse portfolios of different option contracts. With these portfolios, they are able to trade their own option contracts when desired. For example, if a trader wants to buy option contracts, but there is no specific seller at the time, then market makers will sell option contracts from their portfolio to the trader. Or if a trader wants to sell option contracts, but there is no specific buyer at the time, then the market maker will buy the option contracts from the trader. This ensures that trades are transacted quickly in the options market even if there appears to be no willing buyer or seller.
Without the market makers, traders would not be able to buy or sell options as quickly. There would be fewer transactions in the market overall. A reduced number of transaction means there is a decrease in investing. This leads to fewer funds available to companies, which in turn hurts the companies and the economy as a whole.
Market makers maintain volume and liquidity in financial markets, including the options market. The flow of the options market would go stagnate if not for the work of market makers. Those market makers also have the important role of keeping markets moving quickly and efficiently. This function leads to more transactions, investment and money into the economy overall.