Trading is a zero-sum game. Two market participants are required for a transaction to occur—a buyer and a seller. Every dollar gained by one trader is a dollar lost by another. If one trader profits from an options contract, the counterparty must take the corresponding loss.

This balance ensures that capital is continuously redistributed between market participants, including retail traders, institutional investors, and market makers.

Bid-Ask Spread and Order Execution

Just like any other financial instrument, options have two key price points:

Bid Price: The highest price a buyer is willing to pay for the option.
Ask Price: The lowest price a seller is willing to accept.

The difference between these prices is called the bid-ask spread, representing transaction costs and liquidity:

Narrow spreads indicate high liquidity and lower trading costs.
Wider spreads suggest lower liquidity and higher costs to enter or exit positions.

Slippage occurs when a market order is executed at a worse price than expected due to insufficient liquidity at the desired price. This is more likely in options with low trading volume or wide bid-ask spreads.

There are three main order types:

Market Orders: Executed immediately at the best available price, but may suffer from slippage in volatile or illiquid markets.
Limit Orders: Executed only at a specified price or better, offering more control but no guarantee of execution.
Stop Orders: Activated when a predefined price level is reached, commonly used for automating risk management (e.g., stop-loss orders).

The Role of Market Makers

Market makers play a crucial role by providing liquidity to the options market. They continuously quote both bid and ask prices, ensuring that traders can efficiently enter and exit positions.

When a trader buys an option (at the ask), the market maker is typically selling it.
When a trader sells an option (at the bid), the market maker is usually buying it.

Their main profit source is the bid-ask spread—buying at the bid price and selling at the ask price.

Market makers are exposed to risk when they accumulate large positions, especially in unbalanced markets. If they cannot immediately offload a position, they may hold residual exposure. To manage this, market makers use hedging strategies, such as delta hedging, to reduce directional risk by trading the underlying asset.

Liquidity and the SPX Options Chain

Liquidity significantly influences options trading by affecting:

Order execution speed
Pricing efficiency
Market stability

The SPX (S&P 500 index) options market is one of the most liquid in the world, characterized by:

Thousands of contracts across strikes and expirations
High and growing trading volumes
Deep participation by institutions, funds, and retail traders

Due to this activity, market makers frequently accumulate large residual positions that must be actively hedged. This dynamic makes SPX options a central focus for market-making operations and hedging activity.

Open Interest and Net Positioning

Understanding market maker positioning helps traders anticipate potential price movements and volatility. Two key metrics are often referenced: Open Interest (OI) and Net Positioning.

What is Open Interest?

Open Interest represents the total number of outstanding (open) contracts at a given strike and expiration.

What Open Interest shows:

General trading activity and market interest at specific strikes
Potential liquidity zones where volume is concentrated

What Open Interest lacks:

No indication of whether the open contracts were bought or sold
No insight into net directional exposure
No data on hedging activity

Why Open Interest Can Be Misleading

Since Open Interest aggregates both sides of a trade, it cannot indicate whether traders are bullish or bearish. For example, high open interest at a strike could result from heavy call buying (bullish) or call writing (bearish)—but Open Interest alone doesn’t differentiate.

Net Positioning vs. Open Interest

Net Positioning accounts for the directional stance of market participants by considering both long and short positions.

If market makers are net long, they are holding more bought options.
If net short, they are holding more written (sold) options.

This provides a clearer view of exposure and potential hedging activity.

While Open Interest gives a broad overview of market participation, Net Positioning delivers specificity—making it a more effective tool for analyzing market maker behavior and forecasting possible market impacts.

Key Takeaways

Options trading is a zero-sum game—every profit comes with a matching loss.
The bid-ask spread reflects liquidity and trading costs. Narrow spreads = better execution.
Slippage is a real risk, especially in illiquid markets.
Market makers provide liquidity but absorb risk when order flow is unbalanced.
Delta hedging helps market makers manage directional risk.
SPX options represent one of the most liquid and actively hedged markets globally.
Open Interest lacks directional insight and can be misleading.
Net Positioning offers a better understanding of actual exposure and market pressure.

‍