Higher call volume does not necessarily mean more call buyers?

S

smcoder

I'm learning about options and was reading an article that says the following

Higher call volume does not necessarily mean more call buyers. Call traders may be selling calls. It is not the disparity in volume, but the disparity in the volatility of calls vs. puts that indicates the side (buy vs sell) that call traders are taking. If call volatilities are higher than put volatilities, this indicates that traders are buying calls. An excess of call buyers reveals a skew that favors the stock price going up. A similar argument can be made for expensive puts.

High volume and low volatility indicates that option contracts are being sold. High volume and high volatility indicates option contracts are being purchased.

and I'm not getting a few things....

  1. Higher call volume does not necessarily mean more call buyers. Call traders may be selling calls. -> I don't get this but I think it is the same I'm asking at 3
  2. is "volatility" described above referring to the implied volatility or is it describing the volatility (i.e. fluctuation of option prices) due to an imbalance between buyers and sellers?
  3. High volume and low volatility indicates that option contracts are being sold. -> does "sold" mean that option contracts are being closed (open interest decreasing) ?
  4. High volume and high volatility indicates option contracts are being purchased. -> if my interpretation at the prev point is correct, I suppose "purchased" here means contracts are being opened (open interest increasing)
 
pyew you need a few good option books to read cause you don't seem to understand the basics and I don't feel like spending the next hour to try to explain you things on a sunday evening. But to summarize calls can both be bought or sold as an opening trade by retail or institutional investors who seek some directional exposure. The market makers take the other side of those. These last are most worried about implied vol. Any imbalances in supply or demand will be reflected in the vol across the strikes or skew. This is about the basic explanation. For the rest of it: read a good book or two three about options wich covers more than the basics.
 
cvds16 said:
pyew you need a few good option books to read read a good book or two three about options wich covers more than the basics.
More...
what can you suggest as books over the average ?
surprise me )
 
smcoder said:
I'm learning about options and was reading an article that says the following

Higher call volume does not necessarily mean more call buyers. Call traders may be selling calls. It is not the disparity in volume, but the disparity in the volatility of calls vs. puts that indicates the side (buy vs sell) that call traders are taking. If call volatilities are higher than put volatilities, this indicates that traders are buying calls. An excess of call buyers reveals a skew that favors the stock price going up. A similar argument can be made for expensive puts.

High volume and low volatility indicates that option contracts are being sold. High volume and high volatility indicates option contracts are being purchased.

and I'm not getting a few things....

  1. Higher call volume does not necessarily mean more call buyers. Call traders may be selling calls. -> I don't get this but I think it is the same I'm asking at 3
  2. is "volatility" described above referring to the implied volatility or is it describing the volatility (i.e. fluctuation of option prices) due to an imbalance between buyers and sellers?
  3. High volume and low volatility indicates that option contracts are being sold. -> does "sold" mean that option contracts are being closed (open interest decreasing) ?
  4. High volume and high volatility indicates option contracts are being purchased. -> if my interpretation at the prev point is correct, I suppose "purchased" here means contracts are being opened (open interest increasing)
More...


Not sure I can answer it best, here is just my quick take:
Re: 1
You can sell calls when you believe the stock is bearish and more likely to drop in price than going up. Though you can also sell calls as part of various strategies, whether hedging, or trading complex option setups/strategies like iron condors and baskets, carrying/rolling a previous call from week to week, etc.

Re: 2
Yes, most likely they refer to IV.

Re: 3
No, by "sold" they likely mean what I described in #1. Many calls are sold as new positions (to open), but also sold as part of strategies, hedging, etc.
There are also ITM calls and OTM calls and spreads, but they can be converted to puts, so you can create bullish or bearish positions using either one.

Re: 4
That may be correct assessment, in terms of high volume and increasing IV on calls indicating more calls being purchased than sold, and generally more bullish sentiment.

5. Keep in mind that none of that may help in predicting market direction. Even if you can tell if more people are bullish vs bearish, it doesn't mean they're right. Last July/August Softbank was buying calls on some stocks with everyone else who was bullish, and it worked for couple months until they all lost. Big reversal surprises also happened in Feb 2018, March 2020, and many other periods.
You could also use VIX to estimate "fear" in the market, as it jumps as soon as people start getting scared and start buying puts. VIX may increase in bullish market, but not as quickly and not to the level of "fear". While VIX indicates how expensive SPY/SPX options are, which maps back to IV. Likewise, the price of options (IV) on individual stocks may work like VIX for the market.
 
Options as a strategic investment Mc Millan
Option volatility and pricing Sheldon Natenberg come to mind
and the more advanced option market making Allan J. Baird
 
guru said:
Not sure I can answer it best, here is just my quick take:
Re: 1
You can sell calls when you believe the stock is bearish and more likely to drop in price than going up. Though you can also sell calls as part of various strategies, whether hedging, or trading complex option setups/strategies like iron condors and baskets, carrying/rolling a previous call from week to week, etc.

Re: 2
Yes, most likely they refer to IV.

Re: 3
No, by "sold" they likely mean what I described in #1. Many calls are sold as new positions (to open), but also sold as part of strategies, hedging, etc.
There are also ITM calls and OTM calls and spreads, but they can be converted to puts, so you can create bullish or bearish positions using either one.

Re: 4
That may be correct assessment, in terms of high volume and increasing IV on calls indicating more calls being purchased than sold, and generally more bullish sentiment.

5. Keep in mind that none of that may help in predicting market direction. Even if you can tell if more people are bullish vs bearish, it doesn't mean they're right. Last July/August Softbank was buying calls on some stocks with everyone else who was bullish, and it worked for couple months until they all lost. Big reversal surprises also happened in Feb 2018, March 2020, and many other periods.
You could also use VIX to estimate "fear" in the market, as it jumps as soon as people start getting scared and start buying puts. VIX may increase in bullish market, but not as quickly and not to the level of "fear". While VIX indicates how expensive SPY/SPX options are, which maps back to IV. Likewise, the price of options (IV) on individual stocks may work like VIX for the market.
More...

Thank you so much for the taking time to explain things to me. I understand that calls can be only a component of multileg strategies, still isolating the calls part of those strategies I don't completely get how you can have high call volumes and not have more call buyers....unless the situation described is that of high call volumes but decreasing open interest/contracts, in other words people closing calls, not opening new ones.
 
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smcoder said:
I don't completely get how you can have high call volumes and not have more call buyers
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People sell anything that they think is too expensive and they can make money off of. If you think that a stock is overpriced you can also sell shares short, without owning or closing anything. And without sellers there wouldn't be anyone to buy from. A call doesn't even exist until you want to buy one and find someone else who is willing to take the risk and sign a contract that they will sell one to you, if they can get sufficient price to justify taking risk, even if temporary. Without a sufficient number of potential sellers you'd have to pay astronomical prices for a call, until you'd find someone that would finally say "ok, I'll take the risk and sell you one for a cool 1000% markup". While without buyers, the sellers would have to lower their call prices until they find someone willing to buy one. And the options prices are actually self-balancing in such way. You have to have a buyer and a seller for an option contract to come into existence, even if it didn't exist a minute earlier.
 
for every buyer there is a seller and for every seller there is a buyer. Open intrest decreases when the public closes their orignal trade and it increases when the public initiates a new trade.
 
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