Hi guys, I have a couple of questions about options: 1. Is the options volume made of volume created by traders ? i.e. shares have to be given by an organization. But options are made in the market ? is that correct ? 2. If the above is true, how do market factors such as IV, delta, theta etc run so methodically ! When I look at the market the option prices for various strike prices, they are so, what can I say, at least appear formulaic .. How is that possible given many who are non professionals or organizations etc are also writing options and buying them ?
#1. Options volume is created when a buy and sell make a contract-agree on price. The rest is preset. #2. I have no idea how to respond.
If you look at a less liquid stock, IV does not look so methodical anymore (remember the greeks and IV all depend on the price, if the prices are all over the place, your greeks + iv on the option chain will look weird). For very liquid stocks, the greeks and IV will usually look good. This is because if price gets really different relative to another option, the market makers and big hedge funds who watch the tape every second will do a statistical or pure arbitrage and make the option chain look methodical again. BUT although it might look "methodical" there are usually bumps all over the place!! I'll see if I can dig up a local vol surface graph to show you.
What is the preset element ? How is it that the price agreed to is consistently formulaic - like the IV increase increases option prices. A stock price may be simpler to valuate - plus it is issued by the organization. where as the option are purely generated in the market.
An option contract is a standardized contract with terms - Symbol-number of shares-strike price-expiration date. The only thing left for the two parties is coming together on price. You are getting way to complicated. Very few participant that generate order flow do anything except want to do a spread or a buy write or just buy an option with a directional view. The Market makers generate a set of assumptions in the option model based on that symbol and how it relates to the index baskets. The MMs create the starting place for depth and liquidity, then react to supply and demand.
IV is calculated iteratively from option prices. Higher price -> higher IV. Hist vol, interest rate, divs, supply/demand, gamma, delta, theta, vega, vomma, ultima...heck just run with it! Small trader is not going to affect prices much. You don't have to know what's in sausage to like it.
Good God man, that looks like something from a Ridley Scott movie from the 1980s, when they are trying to find a landing point for their ship. You options guys are nuts!