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When a person A decides to sell to open an options contract through his / her brokerage, I always thought that this results in an options contract being written on behalf of person A by the brokerage, which person A is obligated to fulfill in the event that another party buys and exercises the option. In this case, the other party would be opening to buy, I guess. But who buys the newly created option? Is it a market maker, holding on to it until another investor buys it retail? Similarly, if person A were to buy to open an option position, who would write the position? Does the option get written as a result of this action? Is a market maker or brokerage writing the option on the spot, or is it another person, call him / her person B, acting as an independent investor who has the option contract written when executing a sell to open action. If it is, in fact, another person, how does the brokerage firm find this other person when person A buys to open? Does the other person just put their written option up on the market for auction indefinitely?

I have the unnerving feeling that half of these ideas are probably wrong, but I do not know which ones...

Andrew
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The buyer can be another investor who wishes to buy what the seller is selling, or the market maker who is obliged to take the other side. The market matches buyer and sellers just like it does for stocks.

When I look to buy an option, it can be the same, either a seller owning the position or the market maker creating it.

When you buy an option contract, how often is the market maker providing the contract (vs. another investor)? is very similar, may even be 'duplicate'.

Community
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JTP - Apologise to Monica
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  • Thanks for the reply. I'm still a little unclear as to when the option gets written, though. Does the open interest for the option always increase when someone buys to open or sells to open? Does it stay the same? – Andrew Oct 27 '13 at 21:05
  • If a new contract is created, open interest increases. If a contract already open is traded, it's volume, but open interest is the same. See Yahoo finance options on your favorite stock, some have very high volume/open interest, some are very low. – JTP - Apologise to Monica Oct 27 '13 at 21:30