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A market maker in calls and puts must always be ready to take the other side...

A market maker in calls and puts must always be ready to take the other side of any customer orders to buy or sell options without incurring the risk of an outright position... Explain what such a broker might do when a customer wants to sell a large quantity of at the money puts.

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Answer #1

the offers in market are much transparent and both the ways it provides same level of risk, i.e. for both buyer and seller the amount of risk is same. Hence, if an investor is selling large quantity of puts, on the other hand the broker has to look over large quantity of buying put options. Because the opposite action of selling put option with same or other maturities.

The actions of options which make the investor safe is:

  • buying a call option and selling put option
  • buying a put option and selling call option

both these actions make the investor to protect himself from high risk, it is the same to the market maker too.

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