calls and puts, who is driving who?

Discussion in 'Options' started by NanoTick, Aug 10, 2012.

  1. New to options. After reading the basics one question arises is this: if there is an increased asymmetric demand for calls and thus driving up its price, by parity relationship the corresponding puts price should also go up (i.e. driving by arbitrage). In this case the demand for calls is the original driving force and arbitrage is reactionary. However, for an average observer, he only sees the call/put prices go up but can't decern if it's the demand for calls or demand for puts that is driving up the price.

    Or can he ?

    (The prices of call/put here are measured by IV.)
  2. I believe you have have to observe whether the particular option was being bought/sold, at the bid or the ask.
    If i saw a huge volume increase in a stocks calls over its usual vol, and it were traded at the bid vs the ask, that would seem to reflect someone was buying the calls vs selling them.
    Thus a bullish indicator.
  3. 1) ?.....I hope this is what you're looking for..... if call option premiums are rising while the underlying is "still", you would expect the put premiums to rise by about the same amount also because of put/call parity. (Implied volatility is rising).
    2) If call option premiums are rising while the underlying is rising, you would expect the put premiums to decline as a result of the puts going out-of-the-money and likely volatility decay.
    3) If call option premiums are rising while the underlying is declining, you would expect the put premiums to be exploding because of volatility expansion and the puts going deeper in-the-money.
    4) If you roughly know the call option's delta and compare the option premium fluctuation to the underlying's fluctuation, you can have an idea of what is happening with the IV. :cool:
  4. 2rosy


    are you saying if call vol goes up then put vol must go up? why?
  5. The demand for vol is the OTM, not necessarily the calls, but yes, on the upside it's the calls.
  6. sle


    That's not what he's saying, but it is nearly always true.

    For the same strike it's driven by p/c parity, obviously, and will be true always (except when U/L is hard to borrow or when there is a strong demand for funding).

    For different strikes this is usually true because level of volatility is a "stronger" market parameter then the slope of the skew. There was a time when you could arb this by hand as a market maker, but that was WBW (way back when).
  7. Sorry I did not make my question very claer. I'm not talking about the premium, which includes the intrinsic value and time value. I'm talking about the IV which should be the same for a call and put of the same strike and expiry. In other words, if you see the IV go up, how do you know if it's driven by the demand for calls (bullish), put(bearish), or both(neutural speculation)?
  8. Thanks PM. Have you applied this kind of observations to your trading and does it give you any predictive power in directionality?
  9. the volatility Assumption..... you guys can correct me if i'm wrong.. i've done a bit of reading on this subject.. IE any book that has volatility on the cover... and the deal is... there are theorectial prices.. based upon the volatility of the stock.. which is realized or historical volatility.. and there are the implied volatility of the options.. which are what the options are actually priced at in relation to their strike and the Underlyings price.. In order to understand why vol goes up in both the puts and calls you have to understand the mechanics of what happens when you actually buy.. or demand is created for calls... in order to hedge the sale of an option another option or thereof underlying deltas need to be bought to hedge the sale... in two forms of delta hedging.. Gamma scapling or bleeding... yes it does have to do with put call parity.. look up reversals and conversions.. your synthetic short the stock and long the underlying at the same time.. or vice versa So when large amounts of calls are bought.. there is an opposing transaction in other options and in the underlying.. of course its more efficient if you can just use other options to make markets with and in that matter.. when a huge order for calls goes through there obviously isn't a retailer sitting there posting the bid on the whole order.. its a market maker.. who has such a price set for the bid.. such that he can purchase a put at the same strike and the correct amount of underlying to hedge the position based on the position delta... he then makes the bid and ask spread.. because he is buying options closer to the ask and selling them closer to the bid.. and he has his cost of carry and all profit already fixated into the trade.. ..

    so with the sale of a call... a market maker is buying a put.. thereof driving the price up of the puts as well.. several strategies fall under the hedging for market makers..
    wrangles -- backspreads
    Jelly rolls..

    let me know if any of that makes sense..
  10. by the way.. pick up a couple books on the whole thing... i've made the sugguestions many times to read more.. and i will do it again... read more.. this is where i would start considering all the books i've read about the matter..

    Option Market Making: Trading and Risk Analysis for the Financial and Commodity Option Markets (Wiley Finance) Allen Jan Baird

    Trading Options as a Professional: Techniques for Market Makers and Experienced Traders james Bittman

    there are several other books.. but the first one is small and so to the point its sick.. some of the other books go so far into partial differential equations and thereof derivatives such as Gamma, vomma, Vanna, charm DvegaDtime.. then onto third order greeks... and let me just tell you this... don't be intimidated at all with all this bullshit.. remmeber the guys that came up with this model almost blew up the system "LTCM" any other questions i'd be happpy to help with....
    #10     Aug 10, 2012