Market Makers and Faeries
We have some fellow option market makers in the room so I want to use this time to dispel one particular notion about Option markets that captures the popular imagination. There is an extended belief that on expiration day option market makers manipulate the price of an underlying to make sure that a vast number of options by open interest (puts and calls) end out of the money so they don't have to pay out.
This notion is completely false, that is not how the options market works. There is not a single option market maker playing terminal distribution here, every single professional outfit (individual or entity) that deals in options hedge their exposure, so the net effect is that on expiration day they don't really care if their options are ITM or OTM because the money made in market making all comes from the good ole bid/ask spread scalping (in this case volatility scalping).
Open Interest is indeed a very useful indicator for many things, but not because there is a secret cabal of evil market makers moving the market against you. It is useful to compute Gamma Imbalance which has very visible effects on markets, and in particular for options that settle in shares it does have an effect on pinning around a strike value instead of a random close on expiration day.
The resources required to move something like SPY/ES/SPX 1 single point up or down are huge during regular market hours. The amount of liquidity and continuous arbitrage in those products means that it is nearly impossible to manipulate price at will. You would have to spends huge amounts of money to get it to move and for what ? You end up spending more money and assuming more risk (now your are net short or net long the market) than what you would have to pay out on the options anyway.
It is myth plain and simple, the Evil Market Maker is on the same ontological space than Faeries.