The Other Side — Who’s Trading Options
"Every option you buy, someone sold to you. The kid who does not know who that someone is — that kid is the prey, and does not know it."
Every Option Has Two Sides
When you click "buy 1 call" on your screen, a real human or algorithm somewhere is clicking "sell 1 call" at the same moment. They are not your friend. They are not your enemy. They are the other side of your trade, and they almost certainly know more about the option’s fair value than you do.
This chapter is about who they are. Most retail traders never think about it. That is a mistake. You cannot play a game well if you do not know who else is at the table.
The Major Participants
The US options market clears about 10 billion contracts a year through the OCC, divided among very different participants with very different motivations (OCC clearing statistics; CBOE published flow reports). The taxonomy below is rough — actual flow blurs the categories — but the framework is useful.
1. Retail Traders
That is us. Individual accounts, typically self-directed, typically speculative.
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Total volume share: roughly 25-30% of US options volume by some 2022-2024 estimates (industry sources, CBOE-cited research). This has grown sharply since 2020.
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Typical trades: short-dated long premium (calls and puts), covered calls, cash-secured puts, occasional spreads.
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Information edge: small to negative. We are usually the last to learn material news.
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Our gift to the market: liquidity, premium for sellers to harvest, and — frequently — directional exposure that other participants take the other side of.
2. Market Makers
The professionals who quote both bid and ask continuously on virtually every listed option. When you place a market order to buy, you usually trade against a market maker who has agreed (with the exchange) to provide liquidity.
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Their goal: profit from the bid-ask spread you pay every time you cross.
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Their hedge: they do not take a directional view. They hedge their delta exposure aggressively, often within seconds, by trading the underlying stock or futures.
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Their edge: superior modeling. They know the fair value of an option better than you do, because they see all the flow.
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Their not-job: predicting direction.
Hull (2018, Ch 2) and Sinclair (2010, Ch 11) describe market makers in detail. The takeaway for retail: market makers are not your enemy, but they earn a small consistent edge on every trade you make, by design. The bid-ask spread is the price of liquidity.
3. Hedge Funds
A wide and varied group. The strategies they pursue with options include:
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Long/short equity — using calls and puts as leveraged single-name positions.
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Volatility arbitrage — trading the spread between implied and realized volatility (Sinclair, 2013).
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Dispersion trading — selling index volatility, buying single-name volatility (or vice versa).
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Gamma scalping — owning long-gamma positions and earning from intraday hedging.
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Tail hedging — buying far-OTM puts as crisis insurance (some funds specialize in this).
Their volume share: a meaningful fraction of single-name options flow on liquid US tickers, especially in event windows.
Their information edge: significant. Many hedge funds have research teams, modeling resources, and access to information you do not have.
4. Pension Funds and Insurance Companies
The largest pools of capital in the US financial system. Their options use is heavily hedging-oriented:
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Selling covered calls on equity holdings to generate income.
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Buying protective puts on portfolios.
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Using LEAPS or structured products to manage long-duration liabilities.
Their volume share: smaller in absolute terms than market makers or hedge funds, but their positioning affects the market for long-dated options (LEAPS) disproportionately.
5. Banks and Dealer Desks
Investment banks operate dealer desks that:
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Make markets in OTC and listed options.
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Provide structured products (autocallables, accumulators) to wealth-management clients, then hedge the resulting exposure in listed markets.
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Run prop trading books (proprietary trading, where allowed).
The dealer-desk activity is where the concept of dealer gamma (next section) originates. When dealers hold large net option positions from servicing client flow, their hedging needs spill over into the underlying market.
6. Corporate Hedgers
Companies use options for purposes that have nothing to do with speculation:
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Hedging foreign-exchange exposure (multinational corporations).
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Hedging commodity inputs (airlines hedging jet fuel, food companies hedging grain).
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Hedging share buybacks (issuers selling covered calls on their own shares — yes, this happens).
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Employee stock-option grants (a major source of options activity for some tech companies).
Their flow tends to be systematic — not chasing the market, but executing a hedging program.
7. High-Frequency and Algorithmic Traders
Firms that trade in microseconds, providing liquidity at the top of the order book and exiting almost as fast as they enter. They are not "directional traders" in the usual sense; they earn from the spread, from rebates exchanges pay for liquidity provision, and from short-term inefficiencies.
For retail: HFT is the reason your order can fill instantly. It is also the reason that adverse selection — your limit orders filling when the market is about to move against you — is a real phenomenon (Hull, 2018, Ch 30).
Hedging vs Speculation — The Asymmetry
A critical statistic to internalize. According to various industry estimates (CBOE and BIS publications, with some variance by methodology), in major US equity options markets:
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Roughly 70-80% of institutional options volume is related to hedging or yield enhancement, not directional speculation.
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Roughly 60-70% of retail options volume is directional speculation.
The implication: when you, a retail trader, buy a call expecting the stock to go up, the institution that sold it to you is — quite often — not betting the stock will go down. They are hedging an existing position, or harvesting premium as part of a yield strategy.
This is liberating to understand. The market is not a single zero-sum bet against "the smart money." It is a mosaic of participants with different goals. Your speculation can coexist with someone else’s hedge — both can be rational, both can be right.
It is also humbling. Direction is the dimension where retail is most likely to be wrong, because every other major participant has hedged out their directional exposure. The remaining residual directional flow is concentrated in retail. And the long-run distribution of retail directional positions on hard-to-predict moves is, well, what you would expect.
Dealer Gamma (GEX) — Why the Other Side Matters
This is the most important concept in this chapter, and the least commonly taught.
When dealers (market makers and bank desks) hold large short gamma positions — typically from selling short-dated index options to clients — they must hedge their delta dynamically:
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When the underlying rises, their short calls become more in the money. Their negative gamma forces them to buy the underlying to stay delta-neutral.
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When the underlying falls, their short puts become more in the money. They must sell the underlying.
This creates a destabilizing feedback loop: rising markets get more buying pressure, falling markets get more selling pressure. The market trends harder when dealers are short gamma.
When dealers hold large long gamma positions — from buying options or from positive net positioning — the dynamic reverses. Rising markets see dealer selling (to maintain neutral delta); falling markets see dealer buying. The market is mean-reverting and less volatile.
This framework — popularized by retail-focused services like SqueezeMetrics and SpotGamma in the late 2010s but rooted in market-microstructure literature (e.g., Garleanu, Pedersen, & Poteshman, 2009, Review of Financial Studies) — has practical implications:
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On days when SPX is in a "negative gamma" regime, intraday moves are larger and more directional.
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On days when SPX is in a "positive gamma" regime, intraday moves are smaller and more mean-reverting.
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The "gamma flip" level — where dealer gamma transitions from negative to positive — is often a meaningful technical level.
For retail: you do not need to subscribe to a GEX-data service. But knowing that the other side of your trade is constantly hedging — and that their hedging is itself moving the market — helps explain why some days feel "trendy" and others feel "rangey."
Reading the Tape — Flow Indicators
Beyond GEX, several flow-based indicators are worth knowing. Treat all of them with skepticism; they are popular precisely because they are simple, which means they are also often misleading.
Put/Call Ratio
The ratio of put volume to call volume, computed daily or intraday.
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A ratio > 1.0 = more puts traded than calls. Conventionally interpreted as bearish sentiment.
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A ratio < 0.7 = more calls than puts. Conventionally interpreted as bullish.
The problem: this interpretation assumes the buyer of each option is the dominant counterparty. In reality, a high put-call ratio could mean:
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Bearish speculation (puts being bought).
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Bullish hedging (puts being bought against long stock — neutral signal).
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Bullish premium selling (puts being sold by traders bullish on the underlying).
Without knowing the side (buy-to-open vs sell-to-open), the ratio is essentially noise. Treat as background context, not a signal.
Unusual Options Activity
Brokerage platforms now surface "unusual" volume — when a specific strike’s volume is far above its average. The implication promoted by social media is "someone knows something."
The reality: most unusual activity is also hedging or systematic, not informational. Of the unusual activity that is informational, much is M&A-related — and trading on such information may be illegal. The signal-to-noise ratio is poor for retail use.
"Smart Money" — Myth and Reality
The phrase "follow the smart money" is repeated in trading culture. Let me dissect it.
The myth: there is a unified group of informed traders whose flow you can detect and follow.
The reality:
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Different "smart" participants have opposite views at the same time. A hedge fund may be short SPY while a pension fund is buying calls — both are "smart money."
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Most flow is hedging, not directional. Following it leads you to mistake hedge legs for views.
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The cases where you can detect real informational asymmetry (insider M&A activity) are legally fraught and statistically rare.
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By the time the "unusual activity" tweet appears on social media, the actual informational edge — if any — has already evaporated.
The phrase is best forgotten. Replace it with: "I have my own view, my own setup, and my own checklist. I do not need to follow anyone."
A Note on Counterparty Risk
For US-listed options, you do not have counterparty risk against the trader on the other side. Every options trade in the US is novated to the Options Clearing Corporation (OCC), which becomes the central counterparty to every position (Hull, 2018, Ch 2; OCC’s Characteristics and Risks). When you exercise a call, the OCC delivers the shares; the original seller never enters the picture.
This is a structural protection that did not exist before the OCC’s founding in 1973. It is one of the reasons retail options trading is even possible. Bilateral counterparty risk has been engineered out of listed equity options.
OTC options (over-the-counter, bilateral contracts between institutions) do not have this protection. Those are not retail markets.