Market makers in options try to neutralize their delta exposure. So when they sell a put they have a positive exposure to the price (if price goes up 1 they make 1*delta.) Selling 2 puts ATM has approx +1 delta, so they counter that by selling short 1 stock of the underlying, giving them a ~0 delta exposure.
That's a very ELI5 explanation - it's not as easy as I outlined and there is a lot of readjustning needed to stay neutral.
Gamma is what gives market makers headaches. It's the measure of how fast delta changes when price changes and is what causes market makers having to readjust as price of the underlying moves.
Delta has changed repeatedly for TSLA, which should make it a real headache of a stock for the options market makers.
The ideal situation for a market maker is to match buyers and sellers: X real sellers of this strike, X real buyers. Then they have no exposure and make money on the spread. It's hard for us to tell how much of the current options position is "unbalanced" market maker holdings.
The rules of thumb, however are (a) there are more calls outstanding than puts, and (b) there are more real (non-market-maker) options buyers than sellers. These both appear to apply to TSLA.
So the market makers should, most likely, be unbalanced in the following ways:
1 -- they are selling more calls than they buy. They would *buy* stock to delta-hedge this.
2 -- they are selling more puts than they buy. They would short-sell stock to delta-hedge this.
3 -- they are selling more calls than they are selling puts. So they would typically be net-long the stock, and as the options market gets more active, they would be increasingly net-long.
The market makers make additional money, on top of the spread, by being net sellers, because they benefit from time decay (theta). Which they don't , and generally can't, hedge. If they get into a position where they are net buyers of options, where time decay is against them, they may stop providing liquidity, actually. I've seen the bid price on various strikes simply disappear (no bids).
Now, gamma (change in delta) on TSLA is pretty terrifying. It's nice and low for LEAPS, but as options get close to expiration, it gets very very high. It's also higher as you get closer to the money. So when the stock rises, and all those out-of-the-money calls come into the money, the gamma goes up, and the market-makers have to hedge more. Since there's a bias towards calls being outstanding vs. puts being outstanding, this means the market makers are generally accelerating the rise; as the stock goes up, they have to buy more stock to hedge all those calls they sold.
This is interesting; I only just figured this out. Market makers are actually causing exaggeration of moves (both upward and downward) in the stock.
(Obviously they have a different strategy when expiration dates are right around the corner, when vast money can be made by making sure a particular call strike expires. It's then worth short-selling the stock to keep it below that price. But they'd buy it right back as soon as possible, in aftermarket if necessary, to be rehedged. No wonder options expiration day is known as the "witching hour".)
Now, another issue for market makers is *vega*, volatility. The market makers would want to hedge vega, and I have no idea how they do that. Since they're net sellers, they want to sell when vega is high and buy when vega is low, so their hedge would be primarily against *rising* volatility. I'm not sure what they invest in that appreciates if volatility rises.
