What is a Market Maker?
A Market Maker is a firm or individual who actively quotes two-sided markets in a security, providing bid ask spreads along with the market size of each.
Their job is to supply liquidity to the market and profit off of the bid/ask spread for the given trade
Why do I care about Market Maker obligations?
You care about Market Maker obligations because their obligations directly impact the underlying due to the necessity to hedge said obligations through purchasing the underlying.
In other words, if a Market maker is short 1 call option at 0.40 delta, the Market Maker must offset the risk from the short call. Typically a Market Maker will require holding long 40 shares of the underlying to offset 0.40 delta worth of 1 short contract.
Since an option contract represents 100 shares of the underlying, and since the delta is 0.40, we multiply 0.40 * 100 to calculate how many long shares are required to completely offset the total portfolio.
This is partly why we have had excessive stock movements over the past several years.
As option trading becomes more prevalent due to low barrier of entry for retail, so does the total Market Maker obligations.
Therefore, if the volume is high enough and the underlying pushes past a key strike with abnormally high volume and option interest, it is a good chance that you will see what is called a Short Gamma Squeeze at expiration during the last hour or minutes of trading.
This is due to Market Makers either buying the underlying into strength pushing the underlying beyond the short gamma strike, or conversely, selling the underlying into weakness pushing the underlying beyond the short gamma strike.
No, in fact this is just half the battle. Let’s be clear, Market Makers often have an unbiased outlook on the market. That is, they do not care if the Market goes higher or lower since their role is to supply liquidity to the market and profit off of the bid/ask spread. At the same time, they must also fulfill their risk obligations through purchasing stock of the underlying when supplying options to traders.