Outdated Market Maker Theory Misled Traders

If you’ve been trading options using Greeks like Delta and strategies like iron condors or broken wing butterflies, there’s something critically important you should understand about where these tools came from — and what they were originally designed to do. In this breakdown, options educator John Locke explains the real history behind the Black-Scholes model, Option Delta, and why much of the options education that emerged after 2005 may have been built on a misapplication of market maker theory.

Click here or on the video below to learn more!

What Is Option Delta — Really?

Most options traders are taught that Option Delta represents the probability of an option expiring in the money. But according to John Locke, that’s not the full picture.

Delta is actually an output — not an input. It’s a number that results from how trader behavior is affecting the extrinsic values within the options chain. As Locke explains:

An at-the-money option will carry approximately 50 Delta
Deep in-the-money options approach 100 Delta
Far out-of-the-money options approach 0 Delta
Everything in between is driven by the extrinsic value of the option — which shifts based on what traders are doing in the market

This is an important distinction. Delta is dynamic and trader-driven — not a fixed, objective probability measure.

What Was the Black-Scholes Model Actually Designed For?

Here’s where most retail options education gets it wrong. The Black-Scholes model was not developed as a tool for retail traders to generate profit. According to Locke, it was developed for market makers — specifically to help them hedge and protect their positions after executing trades.

Market makers have a unique role in the options market:

They are required to take the other side of trades — they don’t get to pick and choose positions the way retail traders do
They make their money through transaction volume, not directional speculation
After executing trades, they need a systematic way to hedge their exposure so that large market moves don’t wipe out their transaction profits

The Greeks — Delta, Vega, Theta and others — emerged as outputs of the Black-Scholes model precisely to help market makers understand and manage two primary risks: volatility risk and Delta risk. This was a hedging framework, not a profit-seeking framework.

The Post-2005 Shift: When Market Makers Became Educators

Around 2005, computers began taking over the functions that human market makers had performed on trading floors. As Locke describes it, market makers were effectively displaced from their jobs by automated systems.

What happened next had lasting consequences for options education. These former market makers took the theory they knew — the Greeks, the Black-Scholes framework, probability-based thinking — and began teaching retail traders strategies like:

Iron condors
Broken wing butterflies
Other market-neutral, Greek-managed options strategies

The problem, as Locke points out, is that these strategies were built as hedging tools for people managing large, involuntary positions — not as standalone profit-generating strategies for retail traders.

The Backtesting Problem: No Data, No Proof

One of the most significant issues with the options education wave that followed was the near-total absence of backtesting. As Locke notes, backtesting software with sufficient historical data simply didn’t exist at the time these strategies were being taught and popularized.

That means the educators spreading this approach couldn’t validate whether these strategies actually worked long term as profit tools for retail traders. The strategies were promoted based on theoretical probability reasoning — the belief that options selling at certain Delta levels would expire worthless at a predictable rate — rather than on verified, data-backed performance.

SPX Skew: A Present-Day Consideration

Locke also highlights a current market dynamic worth noting for active options traders: the skew between SPX calls and puts is , in his words, “higher than it’s ever historically been.”

While this skew has always existed in the options market, Locke notes it is significantly more pronounced today — a factor that traders using Greek-based strategies should be aware of when evaluating their positions.

Key Takeaways for Options Traders

✅ Option Delta is an output driven by extrinsic value and trader behavior — not a standalone probability measure
✅ The Black-Scholes model was designed for market maker hedging — not as a retail profit framework
✅ The options education boom post-2005 largely occurred without the ability to backtest strategies against real historical data
✅ SPX skew between calls and puts is currently at historically notable levels, affecting how Greek-based measurements behave

Why This Matters for Your Trading

Understanding the origin and intent of the tools you use is foundational to using them correctly. The Greeks are powerful — but knowing that they were built to serve market maker hedging needs, not retail profit-seeking, changes how you should interpret and apply them.

John Locke’s work through Locke In Your Success focuses on helping traders understand not just how to use these tools, but why they work the way they do — and where the conventional wisdom falls short.

Watch the full video above to hear John Locke walk through this history in detail and explore what it means for the way you approach options trading today.

⚠️ Disclaimer: This content is for educational purposes only and does not constitute financial advice. Options trading involves substantial risk of loss. Please consult a qualified financial professional before making any trading decisions.