I Have been learning a bit about options, and a question that keeps coming to mind is what the ratio of naked to covered options is? This information doesn't seem to be available as a metric anywhere and I was wondering if there is a reason for that?
Nobody knows what you're asking. Long 100 SPY and short the 450C is the same requirement as the short 450P. It's 1:1. You can buy 100 SPY and short 2 450C to effect the synthetic short straddle (short one 450C; short one 450P). The requirement on the straddle is less than outright shares.
Sorry for not clarifying. As an example: Open interest on SPY call, strike price of 450 is 16,280. Out of those 16,280, how do I know how many of them were sold (originally) naked or already covered? Is there a way to know this? Is there an average ratio that tends to play out like 1:1 naked vs covered?
In order to have that data, every one of the brokerages originating the trades would have to report whether the trade was covered or not. I don't think they do that.
Thank you both, makes sense. It gets confusing for me to understand with larger institutions and market makers being included in the mix. I am trying to understand the delta hedging process, but I don't understand how often this is done vs just having covered options from the creation of the options contract.
A CC is not a COB order. The MMer wouldn't see the paired trade, he/she would see the call. He'd cover the call. Let's say the MMer is babysitting something illiquid and can't earn any initial edge but wants the vol-line on his book so he would likely trade half shares against the call (synthetic straddle). Obv the shares are listed elsewhere and offers zero color.
If you are into that sort of stuff,I think this is as good as it gets . https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3505045 Center of Volume Mass: Does Options Trading Predict Stock Returns? Abstract We examine whether the distribution of trades along the set of strike prices of option contracts on the same stock contains information about underlying price discovery. We show that option traders' demand for delta exposure drives the volume-weighted average strike-spot price ratio (VWKS). In turn, we find that VWKS predicts underlying returns and anticipates the flow of fundamental information about the stock. The return predictability is greater but not limited to stocks with higher information asymmetries and arbitrage costs, and becomes stronger ahead of value relevant news. Overall, options trading appears to play an important informational role for underlying markets.
So if I am understanding this correctly, the MM is essentially hedging all calls/puts, irrelevant of whether the option was opened as covered or naked? Sorry if I am misunderstanding, still trying to grasp it all.