First, do market makers write options? Well, not the same ones who make a market in the stock. But there are plenty of professionals who make a market in options. Sure, lots of people, myself included, write options. When you see an option with a tight spread, it is probably because someone is trying to buy or sell some. When you see large spreads that move consistantly with the stock, that the options market maker, who once again, is not the same as the market maker in the stock.
As for options buyers, you have it backwards. Most option buyers are speculators/gamblers and have no interest in the stock, so they never execute, and never own the stock. They simply sell their profitable options. They move on to other options, or whatever. Meanwhile, the option writer, who was holding stock as a hedge so that he couldn't lose money, no longer has any need to own the shares once he buys the options back, so he sells them, driving the stock down a minute amount. Repeated hundreds or thousands of times over, the effect can affect the price of the stock.
Now in the rare cases where calls are executed, it is because the call holder actually wishes to own the stock. He takes the stock that the market maker was holding, and keeps it. No stock transaction takes place at all, and there is no effect on the stock price. This is one of the reasons that the real world effect is always somewhat less than one would predict. Naked option writers are another. Covered call writers who buy the options back and continue to own the stock are a third time when there is no effect.
In order to understand the effect, you have to understand that an arbitrager attempts to maintain a perfectly hedged position where he can't lose money regardless of what the stock does. An example of a perfectly hedged position would be to write a call, buy a put, and own the stock. Or conversely to write a put, buy a call and short the stock. The arb then makes a nice fixed, safe return.
Hope this helps,
Carl |
