Market makers work in the options market to help create liquidity and keep bid/ask spreads from widening too much. In many cases, there will be more demand for calls over puts or puts over calls on an underlying stock. This is where the market makers step in and take the opposite side of trades for both buyers and sellers of option contracts.
Market makers attempt to remain completely hedged at all times in order to avoid risk from movements in the underlying stock prices. They profit from the differences in the bid and ask prices. Without them, volatility would be much higher and bid/ask spreads would spiral out of control at times. Market makers are very important to any derivatives market.| < Prev |
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