You Sell Covered Calls and CSPs — But Who Buys Them? And Is It a Zero-Sum Game?

Who Really Wins in Covered Call and CSP Trades?

Selling covered calls and cash secured puts is a common retail options trading strategy. But whenever you sell these option contracts, someone has to buy them. Who are they? If selling these options is profitable, does that mean the buyers lose money? Or can both the selling and buying be profitable?

Surprisingly, both sides can profit — thanks to how market makers hedge their risk and how volatility traders seek out edge.

In this article, we dig into the market mechanisms that enable these trades. We look at how market makers typically take the other side of the trade, how they stay market-neutral through delta hedging, and how volatility traders buy options and make money in ways that still allow sellers to profit.

The role of market makers in options trades

Market makers are firms or traders that quote both an ask and a bid price for securities. They don’t try to ride market trends or profit from price changes; instead, they aim to make small profits on each trade by selling at the ask and buying at the bid.

Market makers minimize their exposure to market movements by managing their inventory risk. When more of their buy trades are filled than their sell trades, they build an inventory, which exposes them to the risk of a decline in the security’s price. To reduce this risk, they lower their bid and ask prices, which makes it less likely that they buy more due to the lower price they are willing to pay, and makes it more likely that they offload their unwanted inventory.

In highly liquid stock markets, there’s usually a balance between buyers and sellers. There are a significant number of buyers and sellers for every stock, making it easier for market makers to manage their inventory risk.

Options markets, however, are very different. For every stock, index, or ETF, there are thousands of listed options contracts, each far less liquid than a typical security. It’s rare for buy and sell orders in a specific contract to offset each other quickly. In many cases, contracts are held through expiry.

This creates a risk for the market maker, who becomes exposed to changes in the underlying asset’s price. Managing this risk is a key part of their role, and an important factor in how options are priced.

Dynamic Hedging and Option Pricing

Delta is the amount the value of an option contract changes for every $1 move in the underlying stock price. When an options market maker buys option contracts, they hedge this delta exposure.

Let’s consider a market maker who bought a put option on ABC, with a delta of -0.5 and strike of $100. ABC itself is currently trading at $100. The negative delta means the option price decreases by $0.50 if the underlying stock goes up by $1. Since the contract covers 100 shares, the market maker would lose $50. To offset this risk, the market maker buys 50 shares.

Now imagine ABC rises to $102, and the option’s delta changes to -0.49. The market maker now only needs 49 shares to remain delta-neutral. So they sell one of the shares they previously bought at $100 for $102, realizing a $2 profit.

If ABC falls back to $100 again, the delta returns to -0.5. To stay hedged, the market maker buys another share for $100, bringing back their holdings to 50 shares.

If the price declines further to $98, and the delta shifts to -0.51, the market maker needs 51 shares to hedge. They buy another share at $98.

Then, if the stock returns to $100 one more time, the market maker can sell the share they purchased for $98, realizing an additional $2 profit.

As you can see, the market maker profits from these price swings by adjusting their hedge as delta changes. This process of continuously adjusting the stock position as delta changes is known as dynamic hedging. The more volatile the stock is, the more profit can be made from rebalancing. This is why implied volatility directly impacts option prices. Higher volatility means there is more profit to capture from delta hedging.

Delta hedging a call option is similarly profitable. The main difference is that the market maker starts with a short position instead of long.

If instead the market maker had sold the put option, they would have to buy shares as the stock price rises, and sell as it falls, resulting in a loss from dynamic hedging. The premium they receive in this case is expected to offset this loss.

In theory, the fair value of an option contract is the expected profit from a delta hedged portfolio. If a market maker accurately models the expected volatility, they can set their bid slightly below and ask slightly above fair value. Then, by delta hedging their position, they can profit from the spread, without being exposed to market risk.

However, this means the market maker is now exposed to volatility risk. If they end up being a net buyer of options, they can lose money if the realized volatility is lower than the implied volatility. In the next section, we’ll look at how market makers manage this risk, and how other market participants come into play.

Volatility Risk and Volatility Traders

Even when market makers are confident in their volatility models, capital constraints and risk limits prevent them from taking too much risk on one side of the book. Their primary goal is to profit from the spread — not to speculate — so they aim to hedge or offload directional and volatility exposure as much as possible.

If too many buy orders are filled, for example, they will lower their quoted prices. This discourages further sellers, and encourages buyers to step in and take some of the risk. At this point, volatility traders often step in.

Volatility traders — typically hedge funds, prop firms, or volatility desks — look for opportunities where implied volatility is mispriced. One of their core strategies is buying underpriced and selling overpriced options, then dynamically hedging their position to turn that mispricing into profits.

When the market maker’s book becomes imbalanced on one side and they adjust their prices, volatility traders might step in and take the other side of the trade at favorable prices. Some of this flow happens directly in the listed markets, but market making firms also offload their risk via OTC trades or block transactions with institutional volatility desks.

In this way, volatility traders restore balance and act as a check on market makers’ pricing, limiting how much one-sided order flow can distort implied volatility.

Conclusion

In a closed trading environment like betting and crypto trading, there’s always a winner and a loser. For one trader to make money, another trader needs to lose money. The aggregate P/L of all the traders in such systems is zero, minus trading fees.

The stock market, however, is not a zero-sum game. If the companies whose shares are being traded are profitable, the shares become more valuable. This value enters the system, and makes it possible for everybody to profit.

Options trading can also be a win-win game. If the actors that dynamically hedge their positions are long volatility, they profit from their dynamic hedging, which introduces new value into the system, making it viable for both sides of the trade to profit.