A market maker is a securities dealer who undertakes to buy or sell, at all times, at ever-changing prices, the options on a given stock. Note the phrase: "at all times." That means that the market maker cannot just buy or sell when it suits him/her. By being granted market maker status, the trader has an obligation to be available to buy options from sellers, or to sell options to buyers.

The difference between their bid/ask market quotations and yours is simple: You bid only for specific options that you are trying to buy or you display an ask price only for those specific options that you want to sell.

The market maker is obligated to continuously set bid and ask prices for every option on the underlying stock or index.

Whenever you enter an order to buy or sell a specific option or an option spread, the order becomes visible to the market makers. At one time, those market makers gathered in a trading pit on the trading floor of one of the option exchanges, such as the CBOE or AMEX.

 Today, those "trading pits" are populated by computers.

Each of those computers is controlled and operated by a market maker who competes for customer order flow (i.e., the ability to trade with the customer orders).

In addition to market maker quotations, if your buy/sell limit order is not filled immediately, and when your bid becomes the highest published bid price, or the lowest published ask price, that order (via your broker's computer) becomes visible to the world.

Making the Trade

The computer program that contains your order is constantly scanning every displayed bid and ask price for the option identified in for your limit order. As soon as a matching price is found, the computers "agrees on the quantity and price" and the trade is executed.

The trade occurs between your broker's computer program and that of any other market participant. Most of the time you will trade with a market maker, but if another customer is offering to sell at your bid price, then you will trade with that customer (via his/her broker). The mechanics of the trade are identical and it never makes any difference with whom you trade.

If the trade contains enough contracts to complete (fill) your order, the process ends and the trade is reported to you. If you traded fewer contracts than desired, then you are notified of a "partial fill" ("partial" for short) and the remaineder of your order remains in play until it is filled or canceled. 

The Exercise and Assignment

Once the trade occurs, the buyer and seller are separated. The Options Clearing Corporation (OCC) takes over from this point forward and guarantees that all option contracts will be honored. If the option owner exercises his/her rights, then the OCC randomly selects one brokerage firm and assigns the exercise notice to that broker. In turn, the broker randomly selects one if its clients who has a short position in that option -- and that account is assigned the exercise notice. The "trade" that converts any option into a stock position occurs overnight, and the person assigned the notice learns of the assignment before the market opens for trading on the next business day.