Open Interest and Option Availability

J

J.Joseph

Looking for clarification on something I've never had to deal with before.

I was wondering if anyone had done research or knows of statistical data showing some kind of relationship between an option's open interest and the largest order I could get to go through with decent speed and consistency.
For example, if there is an open interest of 1000 at a particular strike price I already know I can buy 4 contracts and the order will go through instantly. But what if I bought 50? or 100? or 200? There's no guarantee that there would be that many available in that moment that other people are willing and ready to part with. Right? So what is generally a good, safe, percentage of the OI that could be purchased any time of day without creating problems?

Also, I was wondering what happens if you create an order that is too large. Does it just get filled slowly as people put in sell orders? Or is it more like a stock where the price just keeps going up until the demand is filled? I'm pretty sure option prices are strictly based on a formula and it's the order just gets filled slowly. But I want to be sure.

So, what are the consequences of putting in an order that is too large (in both the buying and the selling end)?
 
As a suggestion
liquidity probably has more to do with other things such as ...
  • such as where the strike is (ATM, ITM, OTM) than open interest,
  • what is happening in the underlying at the point of time of the trade
  • who holds the OI -- is it concentrated in a few hands, spread or what surrounds that OI - eg was it hedged
  • what is the norm for the underlying
  • how much competititon is in the underlying, how many natural clients (not MM) are there
  • Is there a lot of 2 way order flow or is it the same sellers/buyers every month.

There are a lot of variables at play and you should look for big variations in the norm of OI which might be of more interest.

As to the consequences of too large an order....
Again a lot will depend on circumstances but ultimately price and how quickly you wish the order to be filled also become an issue.
...also what happens if say you want to buy a 1000 contracts and you are worried its too large. Do you break it up, or stick it all in at once....what happens if you get filled immediately.....what happens if you cant get any, or some,...are you needing it now, or can you buy over time.
ie; its all supply and demand at that point in time, for a particular instrument - tomorrow the circumstances might change completely.
 
You are better of observing the market depth than the open interest, IMO

Single-strike OI doesn't really say much, because no MM operates on single strikes but on the entire chain. So a single strike could have low OI and low volume but still a very deep market. MMs hedge globally afaik.
 
J.Joseph said:
Looking for clarification on something I've never had to deal with before.

I was wondering if anyone had done research or knows of statistical data showing some kind of relationship between an option's open interest and the largest order I could get to go through with decent speed and consistency.
For example, if there is an open interest of 1000 at a particular strike price I already know I can buy 4 contracts and the order will go through instantly. But what if I bought 50? or 100? or 200? There's no guarantee that there would be that many available in that moment that other people are willing and ready to part with. Right? So what is generally a good, safe, percentage of the OI that could be purchased any time of day without creating problems?

Also, I was wondering what happens if you create an order that is too large. Does it just get filled slowly as people put in sell orders? Or is it more like a stock where the price just keeps going up until the demand is filled? I'm pretty sure option prices are strictly based on a formula and it's the order just gets filled slowly. But I want to be sure.

So, what are the consequences of putting in an order that is too large (in both the buying and the selling end)?
More...

1. If you open position with plan to hold it to expiration, then you can submit order with how many options you want. But probably not all of them will be filled if your order is too large. Of course if you will offer good price, market makers will take it all no caring about your order size :-)
2. If you have plan to roll those option, if you have some SL, ... then I (personally) want Open Interest to be at least 50 times higher than my desired position. Otherwise I am forced to make my position smaller.

Best thing is just to try and you will see.
 
tom_czr said:
1. If you open position with plan to hold it to expiration, then you can submit order with how many options you want. But probably not all of them will be filled if your order is too large. Of course if you will offer good price, market makers will take it all no caring about your order size :-)
2. If you have plan to roll those option, if you have some SL, ... then I (personally) want Open Interest to be at least 50 times higher than my desired position. Otherwise I am forced to make my position smaller.

Best thing is just to try and you will see.
More...

How did you come to the answer of 50 times? Experience? or something else?

I'm actually just trading the options. Not exercising or rolling. Buy before expiration, sell before expiration.
My account is getting pretty big and while it's nowhere near a limit, I'm just curious to have an idea of where that limit might be. I'm trading SPY options. See the picture attached. As you can see there are lots of options in the open interest. I'm only interested in the ones in the green boxes. If I limit myself to 1/50th of the OI for each strike price and expiration, do you think I could get my orders filled in less than 30 minutes on a regular basis? What's your experience trading 1/50th? And how long do you typically hold a position?
 
I would add to SUIYA's post:
look at underlying volume. If it's trading 100,000 shares/day, it will probably be difficult to trade 1000 contracts as the market maker will have to hedge 50,000 shares into an illiquid underlying.

Don't worry about open interest on a particular line. Worry about open interest overall in the name or on a particular maturity.

Some of my best strategies historically have worked where I was 25 or 30% of the open interest.

Market makers manage their books globally - "long too much AAPL vega, so sell some options" rather than line by line. Also, open interest doesn't mean much. Often the open interest is dominated by one account who is hedging an OTC position. He won't close his trade until the OTC trade is closed (which will probably be at the OTC expiry).
 
J.Joseph said:
Looking for clarification on something I've never had to deal with before.

I was wondering if anyone had done research or knows of statistical data showing some kind of relationship between an option's open interest and the largest order I could get to go through with decent speed and consistency.
For example, if there is an open interest of 1000 at a particular strike price I already know I can buy 4 contracts and the order will go through instantly. But what if I bought 50? or 100? or 200? There's no guarantee that there would be that many available in that moment that other people are willing and ready to part with. Right? So what is generally a good, safe, percentage of the OI that could be purchased any time of day without creating problems?

Also, I was wondering what happens if you create an order that is too large. Does it just get filled slowly as people put in sell orders? Or is it more like a stock where the price just keeps going up until the demand is filled? I'm pretty sure option prices are strictly based on a formula and it's the order just gets filled slowly. But I want to be sure.

So, what are the consequences of putting in an order that is too large (in both the buying and the selling end)?
More...

Open interest in one strike means nothing. Open interest and trading volume might. MMs hedge their trades with stock, but prefer options. The more options they can trade in that underlying and the easier it is to hedge, the bigger they will play.

1245
 
J.Joseph said:
How did you come to the answer of 50 times? Experience? or something else?

I'm actually just trading the options. Not exercising or rolling. Buy before expiration, sell before expiration.
My account is getting pretty big and while it's nowhere near a limit, I'm just curious to have an idea of where that limit might be. I'm trading SPY options. See the picture attached. As you can see there are lots of options in the open interest. I'm only interested in the ones in the green boxes. If I limit myself to 1/50th of the OI for each strike price and expiration, do you think I could get my orders filled in less than 30 minutes on a regular basis? What's your experience trading 1/50th? And how long do you typically hold a position?
More...

50x - experience. I just want to be under radar in case I plan some work with option before it expires. Based on strategy I am willing to go to 10x limit sometimes.
Otherwise I do no care and I am willing to make even 100% of OI if I plan to keep options until expiration.

As I wrote before, just try and u will see.

BTW Post of newwurldmn +1
 
tom_czr said:
50x - experience. I just want to be under radar in case I plan some work with option before it expires. Based on strategy I am willing to go to 10x limit sometimes.
Otherwise I do no care and I am willing to make even 100% of OI if I plan to keep options until expiration.

As I wrote before, just try and u will see.

BTW Post of newwurldmn +1
More...

Thanks for the input. Based on the options I'm trading, I think 1/50 would be more than enough. I guess I can use that figure as a base line estimate and figure the rest out when I get there.
 
i am pretty it works same as stocks:

For stock trading it works like this:

highest bidding and asking price are usually displayed as:
99$ / 500 and 105$ /125 which means someone willing to buy 500 at 99$ and willing to sell 125 at 105$.

Lets stay next highest asking prices lined up like this:
100 @ 106$
200 @ 110$
1000 @ 112$

If you purchase 1000 of this stock then, you will be buying
125 of them at 105$ and
100 of them at 106$
200 of them at 110$
525 of them at 112$.

You can see these lined up ask/bid quotes using more advanced trading platform.
I believe those defined as Level II or more.
Hope I am explaining right.
 
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