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This might be a very broad question, but I would like if someone can please explain to me how a market makers make money in Options market ? Thank you

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    $\begingroup$ This answer should help. In short, the option seller sets the Implied Volatility of the option higher than what he believes will be the realized volatility of the underlying through the life of the option. If the option seller then delta-hedges the option until maturity and his guess about the IV was right he makes money, because the premium of the option will be higher than the cost of delta hedging if the IV indeed proves higher than the realized volatility. $\endgroup$ May 26 at 11:01
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    $\begingroup$ PS: the other (obvious) way they make money is the bid-offer spread. When a client approaches the option market-maker to buy an option, the market-maker will quote one option at (say) £8.1. When a different client approaches the market-makes to sell the same option, the market-maker will quote a bid at (say) £8.05. $\endgroup$ May 26 at 16:31
  • $\begingroup$ Just to add to Jan Stuller's comments regarding hedging and crossing b/o, to a large degree market makers take views (i.e. speculate) on the risk they are given on the back of a trade. They warehouse risk accordingly. No option book is ever run flat or fully hedged in my experience - this would be both impractical and expensive. If the market moves in accordance with their view they monetize it by hedging then. If it doesn't they have to stop out to cut their losses. $\endgroup$
    – user35980
    May 27 at 10:16

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