This is all true, but my question is why are people so afraid of options market makers but not afraid of cash stock market makers or high frequency traders. The latter people find as an annoyance. My theory is that since options are founded on mathematical theory, it is assumed that there is a fair value for options (for example black scholes based on historical vol with some adjustments for the future) and the market maker knows this and quotes around this. So there can be no positive expected value. But there is no such theoretical fair value for stocks so the market maker/hft has no edge other than being a douchebag and front running you. At least this is the argument. But this market maker fear is unfounded. If the underlying has no fair value then how can any asset whose price is derived by it have a fair value.
I did not mean to imply that this month is an aberration. I meant to say that professional traders are having trouble (look at bank records), some hedge funds are having trouble, and most retail I talk to are getting slaughtered. Another thread (Who is really making a living trading options??) seemed to imply that it is not possible. My comment belonged there more than here.
The fear and excitement most people feel doesn't actually come from outside, but from inside. So you are absolutely correct I think. Believe it or not, market makers suffer from the same emotional demons that we do. Their pressure to trade is tougher for them. Look at their burnout rate. The questions related to what you are asking is "why have options at all? What purpose do they serve?". In the answers, I believe, is an enormous edge. MMs (computers) can't front run you consistently because they need to control their risk just like we do. They do have much more knowledge and more tools in their toolbox. Your edge seems to be that you ask intelligent questions. That will eventually pay off handsomely.
Options serve a purpose; that's why there are widely traded. But my comment is that one shouldn't be afraid of market makers. While option modeling is well developed now, if the underlyings don't have fair values then options cannot as well. Therefore, one shouldn't fear that the option has some distinct value and market makers quote around that and make free money. Most market making operations in the options world are now quite large. They have dozens (if not hundreds of programmers) and many many traders whose job it is to interact with the options flow at the behest of the models that tell them how to manage their risk. They are about as emotionless systems as you can get now.
There are massive differences between equity MMs and options MMs... starting with equity MMs get PAID to take liquidity and options markets don't have make-or-take fees. The business models are totally different as are the approaches. Also, options guys - for the most part - are the smartest guys in the room whereas the typical floor broker is not anywhere close to that league.
Yes, the smartest guys in the room & that was evident on most futures exchange floors. Look in the futures pit & traders/brokers Span anywhere from HS to college graduate, a lil brutish, push & shoving. But, just a few short steps away in the futures options pit you'll find some of the same, but mostly the engineering, mathematics majors probably some masters levels or above. Quieter crowd, minding their positions, adjusting their markets, etc. Calculating everything 6 ways to Sunday. I always found the dichotomy amusing.
Because the market makers delta hedge with stock it's entirely possible for an astute directional trader to consistently make money with options at the same time that the MM taking the other side of his trades also makes money on nearly every trade. In that case the profits of the directional trader ultimately come from the stock market, not from the option MM. If you take the market as a whole (stocks + options + futures) then yes, it is essentially zero sum (aside from some small annual average growth in the stock market -- a growth that's been mighty difficult to discern over the last decade). But there's nothing special about options in that regard.