1. There's a serious misconception that bought options burn off time value at some uncontrollable rate, or even an unreasonable rate. They do not, if you buy properly, where "properly" = dated such that the time decay is a fraction of total CV over the period in which you'll likely hold the contract. So like, if you think you're going to end up holding the contract for a few weeks or a month, you buy a contract that's ~6 months out. If you think you want to hold the contract for 6 months or a year, you buy a 24 month leap. If you're day trading and are only going to hold the contract for a few hours (or even minutes) you might buy something for this month or even this week.
Its really the same logic as the other side of the chain--nobody would suggest selling a LEAP for its time decay with the intention of buying it back a few days later, and nobody would suggest selling calls is a terrible idea because there's 'no' time decay off a sold LEAP over the course of a week.
2. Market makers are not simply buying from or selling a contract to you when you open a position (shares or contracts), they're balancing their total market exposure from the gazillions of positions they have with folks like us with (again, more or less) an equal and opposite position. Figuratively at least (its
much more complicated than this), if you sell an $800 call for next week to them, they immediately turn around and buy an $800 call for next week, which exactly offsets any financial exposure to their portfolio from underlying movement because The Greeks of the two contracts are equal and opposite. Where their major source of profit comes in is the bid/ask spread that you and I eat every time we transact with the MM. It might only seem like dollars to us when we pay The Man the spread, but multiplied by the gazillion units they move every day it adds up to a big pile of money to them.
The big rub is that MM's won't (and can't) exactly offset their exposure, for all manner of reasons. There's the pretty obvious reality of "immediately" being less than perfect, there's their huge portfolio to mangage full of plenty of shares and contracts, there's the fact that The Greeks from that $800 call and $800
aren't actually exactly equal and opposite, there's unexpected external forces (from the latest Tesla tree-wrapping to the current sociopolitical crisis and everything in between), etc.
So, at least within the good graces of The Man (SEC, whoever), MM's will <ahem> "hedge" the aforementioned exposure with shares and options in <ahem> "anticipation" of you selling them that $800 call for next week. In fact they have a multi-dimensional analysis that constantly adjusts their portfolio based on your $800 call plus all those other things based on where they see price movement going over the next hour or day or month. Because there's a
ton of volume/money involved with those actions, the actions themselves tend to (Whoops!) drive market pricing as opposed to theoretically just reacting to it. So, naturally, as a for-profit entity the MM will, again at least within the law,
conveniently leverage the fact that their portfolio actions are circular references that generally/usually drives the market
toward their actions.
That's where something like the Max pain theory comes into play...though things like short shares also drive this (which is why Max Pain shouldn't be taken completely literally and absolutely, and should rather just be another tool on your belt).
. I am guilty of using the holding mentality with options I buy because I had good luck last year. My plan was to sell them before earnings at around $750ish SP and IV of 75 ... the IV part never happened.
