It's been so long since i used this observation criteria, you now have me question what I'm looking for. So let me re-phrase my statement, and then I'll yield to the experts here for clarification on the issue. My point is, the call buyer is not trying to "negotiate" the price of the call. He doesn't want to be stupid about it. But he is willing to pay what the price offer currently is. I'm assuming part of the reason for that is, he is placing a huge order and wants it filled quickly. Any other opinions???
Its a matter of liquidity..if you buy just a couple contracts you can get filled at the midpoint between the bid and the ask.. if you put in a super large order your likely gonna run up the price on yourself.... meaning you'll have to hit the bid in order to get a fill... look up bid size... this is kind of a market depth question.
Actually, I think in real time AMM systems actually look at the contract-level pull/push and bring the rest of the surface in-line. PS. Also, when balance sheet is hard to come by, vol for ITM options on both sides will deviate from OTM.
ok what i've been writing becomes extremely confusing when i'm talking about hitting the bid.... i without thinking mixed them up... and your right.. if people are hitting the fuck out of the ask with large orders.. especially out of the money theres a chance.. that someone might know something.. because if you did know something you sure as helll wouldn't buy the underlying considering the amount of leverage you get in buying otm premium Bid is price you can most likely (definitly sell at) Ask is the price you can most likely (Definitly buy at) its like i'm freakin dyslexic ... obviously i would not make a good teacher..
check out SIRI friday, 30k calls traded, $2 JAN14. looking back on the chart there was also a 70K block day back in march on the same contract when the underlying was last over $2. i'm sure there was no simply hitting the bid/ask, or placing a limit order and seeing what happens. once an order is big enough to move the market if placed, it would be in the buyers/sellers best interest to work with the market maker directly, rather than though the market first, no? splitting the spread, both working their end of the trade for a benefit. are large block option trades like this perhaps trades between option MMs, and HFTs playing MM in the stock? giving each some insurance, some inventory, and some cushion to work with day-to-day. otherwise, an arb opportunity greater than what the maket maker(s) controls would be open to the market all the time through greater volume (duh, i think this exists already, by design), but why let your order create an arb opp for someone else to take advantage of? what if that 30k contracts was placed as a market order, blowing though the option MMs book, would it only get filled once the market absorbed it, at whatever price that came to? why would the buyer/seller do this? i'd think they would feel out the market, and see what it could absorb first.
How do you know if the party buying massive calls for underlying market X is not buying as a hedge for massive short position in X? With iceberg orders and black pools, these days its almost impossible to analyse if buyer is big or small fish.
your right.. this could totally be a one element of many strategies either bearish neutral or bullish... i could sit here and brainstorm many ways i could use a huge block of calls to neutralize other options i have on my book or thereof some way to unconcentrate risk in another underlying... how could you say this isn't part of a large dispersion trade.... or a huge institution selling calls or even buying them to either hedge their long or short position.. .. i'm sure there is a way to quantify things in such a way that they make some sense.. but just to think of a large order in calls as anything other then random at first without a good following of alot of other things.. i'd say your shooting in the dark! i'm not sure what a iceberg is or a dark pool. dark pool is a group of traders and trades that are pooled together before they come to the larger market as a part of the microstructure of the market?
It's all about the quantity of contracts that come out of the blue. No news, no unusual stock trading movement for weeks or months, no earnings pending, no talk that would even suggest a takeover had been speculated about in the past. There is NOTHING going on. And then all of a sudden a MASSIVE order to buy calls at whatever price was being asked. The definition of "massive order" will be different for every company, depending on what their so-called normal range of daily call contracts is. And it may be difficult to define, but everyone will know it when they see it. It usually means some big news announcement is pending. A takeover, a merger, approval for a new drug or project, a new huge order for the company, winning a litigation case, and so on.... All I'm saying is, when you see a HUGE and sudden jump in call buying activity, upside movement in the stock often follows over the coming weeks or months. But the increase in call buying really has to be MASSIVE compared to its normal range, for it to be a clue of some bullish movement down the road. It's not a clue that pans out 100% of the time. And you are unlikely to even notice it, unless you happen to be monitoring the stock anyway. And again, a large increase says nothing. It really must be MASSIVE for it to potentially indicate something bullish is pending. When people are betting HUGE money on something happening in a short period of time,..... that's not just talking the talk. That's walking the walk. So all I'm saying is, pay attention to it.