1) Market makers and seat holders DO pay fees for their trades. CBOE publishes their list of fees for all customer types, and these fees aren't cheap. IB offers an unbelievably good deal at $.75/contract. Take a look at the price list and figure out what you would need to pay per month and per contract to trade on the floor. You'd easily exceed $.75 unless you were trading a BIG account. http://www.cboe.com/AboutCBOE/CBOEFeeSchedule.pdf Market makers pay $.15-$.35 per contract, per side, on indicies. They also pay facilities fees, data fees, phone fees, wireless fees, and a monthly membership fee. Not to mention they're out $700k+ for the seat and are financially responsible for all errors. Oh, and they also pay a fee for canceled orders. 2) The price of options are not driven down by hedge funds but rather that the market is at a 4 year high. There are plenty of stocks which have IVs well above 100% despite HVs being in the 20% range. Yes, the VIX/VXN is at a long term low, but it still exceeds historical volatility on most indicies. Wherever IV exceeds HV, the odds are in your favor selling premium (unexpected news events aside). That aside, there's no free lunch for hedge funds or anyone else. If you believe premium is too low, buy options. If it's too high, sell them.
The cost advantage doesn't come from fees per trade but the ability to have open orders to both buy and sell at the same time and not having to large cancelation fees. It is very hard to get good enough fills to make a strategy that requires constant adjustment pay, mostly due to never being in the top of the queue. And don't worry, I am long options. Often I can pay for an option that doesn't expire for to weeks in one days trading. Giving me downside protection while freeing up lots of margin. Sure beats fooling around with stop loss orders and covered calls.
I'm not sure I agree that it's much different for the people on the floor. They're competing for good prices just as much as you are. In fact, they also pay cancelation fees (see the CBOE fee chart), at least for firm orders. Often, you can play the electronic equivalent of open outcry--just wait for a good bid/offer to appear, then snatch it through your online broker. Works great for me, and is almost exactly how the floor system works. "Constant adjustment" should always be done with the stock. Gamma scalping, delta adjustments, etc is all done much better with straight stock.
Market-makers are not financially responsible for all errors. I've had many trades I'd like to keep, that were later busted. Market-makers can cite a number of different reasons for busting your trade.
Market-makers can't "bust" a trade, the exchange does. Trades which are submitted as errors as subject to review (and contesting on your part) unless they are for an inconsequential amount of money. So, if your trades were unfairly busted by the exchange due to an error submitted by the market maker, why did you not contest?
=================== IB is offering a good deal,Fully Art, however option trader nickname sounds like they have a better deal with hi volume. And I checked on OXPS,ISE, they are still in good uptrends how ever you measure uptrends; maybe Wilburbear if /when they get in a bear trend ,maybe you could see some relief on cancel fees.Think its fair as it stands $700k is a lot of money for a seat,another way to do it,frankly some of us would rather do like Rich Dennis. Until Rich could have a bigger budget, he & guests''sat'' on old stacks of the Wall Streeet Journal. Investors Business Daily would work as well or better.
When I say market-makers can bust your trade, I believed other traders would understand this as, "a market-maker can cause your trade to be busted." The market-maker does this with the assistance of floor personnel. Many of the trades referred to were contested. I have been through all three levels of appeal and hierarchy with AMEX options. The trades stay busted.