does increased demand drive up an option call price?

S

stockmarketbeginner

Hello,

I saw a stock today. It was down a bit, and hasn't moved. An hour later, the long option price a few months out on a particular strike price goes up. Nothing changed in the stock price. If anything, the price should go slightly down, because the time value is eroding.

If many people are buying the option at a particular price point, does that cause the price to go up? I thought it was purely a function of how far away the strike price is from the current price, how much time is left on the option, and the characteristic volatility of the stock.

Basically, I thought the option price was a function of a probability calculation, rather than a demand calculation.

I'm surprised the price went up. I'm new at this.
 
Here's the deal

By definition , if there is heavy demand , most of the time, its because of something that will tick up volatility

Thus , therefore, and thereby, an increase in option value
 
stockmarketbeginner said:
Hello,

I saw a stock today. It was down a bit, and hasn't moved. An hour later, the long option price a few months out on a particular strike price goes up. Nothing changed in the stock price. If anything, the price should go slightly down, because the time value is eroding.

If many people are buying the option at a particular price point, does that cause the price to go up? I thought it was purely a function of how far away the strike price is from the current price, how much time is left on the option, and the characteristic volatility of the stock.

Basically, I thought the option price was a function of a probability calculation, rather than a demand calculation.

I'm surprised the price went up. I'm new at this.
More...
The price movement is generally due to a change in perceived volatility. Can you rule that out in this case?
 
Robert Morse said:
I’m going to respectfully disagree. In active options I find supply/demand from flow determines prices over the short run.
More...
No question supply and demand impacts the price and is responsible for the vast majority of the minor moves. I wasn't sure if the OP saw volatility as more or less a fixed value based on the wording of his post. I probably could have better articulated the point that perceived volatility is a constantly changing variable as well.
 
If we're voting, I'm definitely voting with market-wide volatility changes. "Ohhhh Yeah!" :cool:

But too, for a lesser-traded underlying, don't forget that passing interest/market fluctuations will change bid, ask, bid-volume, ask-volume, blah blah blah.... So the greater market 'fair' price might not have changed at all -- we just don't know.
 
MM is going to have to go to the underlying or another option series if it's a big enough order. So a lot depends on the liquidity in the underlying - in fact, many very large orders are facilitated upstairs then brought to the floor to cross/print. Often the trade is initially done tied to stock - so dependent on the ability to get the hedge off in the underlying. A great majority of large orders - over a 1000 contracts - are qualified contingent crosses
 
ajacobson said:
MM is going to have to go to the underlying or another option series if it's a big enough order. So a lot depends on the liquidity in the underlying - in fact, many very large orders are facilitated upstairs then brought to the floor to cross/print. Often the trade is initially done tied to stock - so dependent on the ability to get the hedge off in the underlying. A great majority of large orders - over a 1000 contracts - are qualified contingent crosses
More...
SQ did one of these on Thursday on the January puts...picked up on the ask, and with matching order on the shares simultaneously. I'm still trying to figure out what the endgame was here. Because they made or like a bandit today and didn't close.
 
Securities Lending fees are expressed as an interest rate. Changes in these interest rates affect forward values but not spot prices. Perhaps this was a hard to borrow name with a high borrow fee that went into a warm to borrow or even GC. This would explain the phenomena if the options reacting without any movement in the stock. That said, all options would have reacted similarly to the change in the forward valuation.
 
You must log in or register to reply here.
Back
Top