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Who trades options

Buying or selling an option is a process quite similar to buying or selling stock.


In fact, it trades pretty much like any other security. You probably already know how exchanges work.

But figuring out just how options who trades options hands can be a little confusing. Retail investors Retail investors are individuals like you who are buying and selling options with their own money for personal profit.

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Their objective is usually to make a significant percentage gain on their initial investments. Normally, individual retail investors will be trading on a smaller scale than other players in the game.

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Institutional traders Institutional traders are professionals trading for large entities like mutual funds, hedge funds, etc. Oftentimes they will trade options to hedge their positions, but they may also trade options as pure speculation.

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Broker-dealers Broker-dealers are in the game to facilitate trades. These are firms like Ally Investthat accept orders on behalf of clients and then ensure they are executed in the open market at the best available price. This is done in exchange for commissions on the trade.

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Market makers Market makers are the lb. Thus, market makers provide liquidity in the options marketplace.

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  • If you want to start trading options, the first step is to clear up some of that mystery.

In other words, market makers stand ready to take the opposite side of a trade, if and when one of the other players wants to buy or sell an option. Market makers provide a firm bid and ask offer price in order to facilitate trading on that option.

Market Makers

In theory, market makers earn their profits from the difference between the bid and ask price of options. In practice, the picture is a little more complex. But for now, the above scenario is who trades options you really need to know. Exchanges Exchanges exist to maintain a fair and orderly marketplace and to provide timely dissemination of price information.

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Any time you place an option order, it is routed to an exchange, where buyers are matched with sellers. Where your Option Orders Go So who's on the other side of my option trade? When you enter an option order with Ally Invest, we look in the marketplace for the national best bid or offer price for your trade. Your transaction is then matched with the entity providing that bid or offer.

Best Options Trading Platforms

Much of the time you will be trading with a market maker. However, you may instead wind up trading with an institutional trader, a dealer, or another retail client. Ultimately, what this all means is that there will always be a market for any exchange-traded option you would like to buy or sell. You may not always like the market for a given option, but rest assured it will always be there for you to participate in should you choose to do so.