Low IV = selling, high IV = buying?

Discussion in 'Options' started by smcoder, Jan 4, 2021.

  1. smcoder

    smcoder

    In an article I was reading here there I found these two statements

    High volume and low volatility indicates that option contracts are being sold.
    High volume and high volatility indicates option contracts are being purchased.


    Are they always true? Does low IV = higher selling volume (vs buying volume) and high IV = higher buying volume (vs selling volume) ?
     
  2. No. This is tea-leaf stuff.
     
    tommcginnis and JSOP like this.
  3. If anything, it would be the opposite. If IV is low, so is the premium - so you'll be selling low and (later, when IV reverts to mean) buying high. And vice versa.

    If you wouldn't do it, why would anyone else?

    Toss in the fact that the big boys like to hide their tracks, add in synthetics, and you end up with a purely arbitrary stew of numbers. If anyone has data to the contrary, I'd like to see it - but IMO, little or no intelligence can be extracted just from volume alone.
     
  4. The data is random to obfuscate complexity. If you want to trade a security, you need to understand why other market actors trade it.
     
  5. guru

    guru

    I think it's true. Shouldn't be much different than with stocks. When there is demand then stock and option prices go up, which means IV for options. If someone thinks that options are too cheap (low IV) then they will buy those cheap options. If they think that options are too expensive then they'll sell them, lowering the IV. I often cannot buy cheap options when everyone else is buying them.
    Same with stocks.
     
    qlai likes this.
  6. umbolox

    umbolox

    HI
    We made a video on this

     
  7. tommcginnis

    tommcginnis

    The phrasing smacks of Investopedia cuteness. :confused: But whenever an option contract is "sold", it is also being "purchased" from the counterparty's view. (As per any good/service in any market.) At any time, there will be precisely as many "sellers" as "purchasers" for any set of option contract transactions.

    This might be conflated with option creation v. open interest (versus a fixed quantity item like equity shares) -- but that is a whole 'nuther kettle.
     
    longandshort, cesfx and caroy like this.
  8. smcoder

    smcoder

    Good point but on the other hand consider the following, prices in all markets (not only financial markets) tend to rise when there is imbalance on the buying side, i.e. greater buying volume than selling volume. And increasing prices for options should mean increasing IV, right?

    So to sum it up, do you think the following makes sense?
    • options buying (i.e. greater buying volume vs selling volume) -> rising option prices -> rising IV
    • options selling (i.e. greater selling volume vs selling volume) -> decreasing option prices -> decreasing IV
     
    Last edited: Jan 5, 2021
  9. smcoder

    smcoder

    @tommcginnis you are perfectly right and I believe that in the article
    • "sold" really means "greater selling volume vs buying volume"
    • "purchase" means "greater buying volume vs selling volume"
     
    Last edited: Jan 5, 2021
  10. smcoder

    smcoder

    Thank you. I listened to your video but I was not able to find a clear answer to my question. In your video you say the following

    price of underlying rises -> IV tends to decrease (thus options prices tend to decrease)

    but at this point what is it that moves more IV, movement of options prices or movement of the underlying?

    Or is it something like underlying price -> option price -> IV

    I read that the process for identifying option prices and IV should work more or less in the following order
    1. for a given expiry date, buying vs selling volumes ATM define option prices ATM
    2. option prices ATM allow calculating IV ATM
    3. IV skew algos are applied for all other strikes to identify IV and thus prices
     
    Last edited: Jan 5, 2021
    #10     Jan 5, 2021