While learning about options trading, the following question came up. I'm hoping someone here can help answer it. Please excuse any (likely) imperfect terminology and understanding.
Are call and put options just like equities, where there has to be a buyer and seller of the option? Or is there often a "house" involved that is offering call and put options in bulk, much like a "bookie" may offer a bet on a sporting event without a counter-bet?
Yes and no.
You generally trade with another trader that wants to buy / sell at that moment what you want to sell / buy, for that price - exactly like with shares.
However, there are ‘market makers’ whose role it is to make sure the market is liquid, and they will trade with you if nobody else wants to - but for a price they think is fair for them (this is also the same as with shares).
With options, they are probably more active than with shares, as there are so many variations (strike prices and expiry date), so they are needed more often. As a result, you could always trade any option at ‘market price’, and it will get immediately filled (though it might not be a good deal).
Options trade just like equities do. For every buyer of a contract there is a seller. It's an auction where the market participants place orders at whatever price they like. In the U.S., the quote that you receive is called NBBO (National Best Bid and Offer) which means the lowest ask price and the highest bid price on the order book.
The counterparty could be anyone (the market maker, a floor trader, an institutional trader or a retail trader like us).
