Option Strategy

[JJacksET4]

Quote from dmo:

Of course, if there's a price, there's an IV. But if there's no demand, there is no price, and therefore no IV.

I thought it would be obvious to everyone that no demand = no price. No demand means nobody wants to buy it. If nobody wants to buy it, there is no bid. No bid means no price.

If anyone wishes to insist that you can have a bid greater than zero and at the same time no demand, then I'm afraid we're speaking two different languages.

dmo, I am very familiar with "what" IV "is" and how to use it, etc. Of course, I understand what you are saying, but I look at demand differently. For example, an expensive, volatile stock might have a high IV, yet the demand for options for the stock could be quite low - not to say there is no demand, but only a few people trade that particular stock - yet the IV is high.

On the other hand, there are stocks like JNJ, MMM, MSFT, EMC whatever, where there is alot of demand for the options, but the prices remain low (low IV) because the stocks aren't expected to move much. In other words, IV is exactly what it says it is - the Volatility that is being implied for that specific option.

For example, say there are 2 stocks - both at $50
One stock is heavily traded and the call and put volumes for the 50 strikes are about 2,000 per day.
The other stock is lightly trades, and the 50 calls and puts trade about 2-10 contracts per day.

Which stock has the higher IV?

You can't tell from this information - but clearly there is more "demand" for the options of the first stock.

On the other hand, if the 50 call for 3 months out for the first stock is say $300 and for the second stock it is $600, the IV is clearly higher for the second stock - the volatiilty that is implied is higher - the "demand" for the option as far as quantity bought is clearly much lower.

JJacksET4

 

[Martinghoul]

As I mentioned in the other thread, I am with dmo here...

IV is just a convenient measure of the price of the option. For instance, in the fx options mkt, options are most often quoted using vols, rather than actual prices.

And, JJacks, you can't compare apples and oranges. Your comparison is sorta like comparing demand for Ferraris with demand for Yugos. They're different, so their prices are different. So it's the fluctuating prices of Yugos that can serve as a measure of supply of and demand for Yugos, but you sure can't conclude anything from them about the demand for Ferraris.

 

[dmo]

Quote from JJacksET4:

dmo, I am very familiar with "what" IV "is" and how to use it, etc. Of course, I understand what you are saying, but I look at demand differently. For example, an expensive, volatile stock might have a high IV, yet the demand for options for the stock could be quite low - not to say there is no demand, but only a few people trade that particular stock - yet the IV is high.

On the other hand, there are stocks like JNJ, MMM, MSFT, EMC whatever, where there is alot of demand for the options, but the prices remain low (low IV) because the stocks aren't expected to move much. In other words, IV is exactly what it says it is - the Volatility that is being implied for that specific option.

For example, say there are 2 stocks - both at $50
One stock is heavily traded and the call and put volumes for the 50 strikes are about 2,000 per day.
The other stock is lightly trades, and the 50 calls and puts trade about 2-10 contracts per day.

Which stock has the higher IV?

You can't tell from this information - but clearly there is more "demand" for the options of the first stock.

On the other hand, if the 50 call for 3 months out for the first stock is say $300 and for the second stock it is $600, the IV is clearly higher for the second stock - the volatiilty that is implied is higher - the "demand" for the option as far as quantity bought is clearly much lower.

JJacksET4

Price is determined by the law of supply and demand, right? The more demand relative to the supply, the higher the price.

By the same token, option IV is also determined by the law of supply and demand. It is determined by nothing else. It cannot be determined by anything else. That is exactly what IV is - the demand for an option relative to the supply.

When demand for IBM goes up relative to the supply, the price of IBM goes up. When demand for an OPTION rises relative to the supply of that option, IV goes up.

In other words, if option buyers become more anxious to buy an option, while option sellers DO NOT become more anxious to sell that option, IV goes up.

What else could possibly determine IV? How else do you think IV goes up and down? The IV fairy?

Volume is a completely separate question. If volume goes up, that does not necessarily mean that demand has gone up. It could have been supply that has gone up. The only way to know is - you guessed it - to look at implied volatility.

An increase in volume accompanied by a rise in IV means that demand has increased relative to supply.

An increase in volume accompanied by a drop in IV means that supply has increased relative to demand.

An increase in volume accompanied by no change in IV means that supply and demand have both increased equally.

 

[dmo]

Quote from Martinghoul:



IV is just a convenient measure of the price of the option. For instance, in the fx options mkt, options are most often quoted using vols, rather than actual prices.

Right. Following, in fact, is a quote directly from the CME http://ftp.cme.com/trading/fx/banks.html

CME Group FX Products for Banks

Our FX options provide you with many choices. Choose your Quoting Method – either Premium or Implied Volatility.

 

[dagnyt]

Quote from dmo:

Are you saying that market makers are required to post a bid greater than zero on every option?

I am at this moment and every moment zero bid for every option in America. If anyone out there wants to give me options for free, let's talk.

I clearly stated that they post a bid UNLESS the natural bid is zero. That bid represents demand. And that was the topic of the discussion. Demand.

If the NATURAL bid is zero, then the bid is ZERO.

There is no requirement to bid any higher - and you already knew that. So, why are you asking?

You strike me as a serious player, so I don't understand why you responded as you did. The fact that you said that you are bid zero for options shows a total lack of understanding of how the system works. Either that or misplaced sarcasm.

1) there is no one to clear such trades

2) There is no way you can hold the other party to the conditions of the contracts

3) You cannot buy options lower than the highest bid, so bidding zero and wanting to 'talk' is beneath you.

Mark

 

[dmo]

Quote from dagnyt:

I clearly stated that they post a bid UNLESS the natural bid is zero. That bid represents demand. And that was the topic of the discussion. Demand.

If the NATURAL bid is zero, then the bid is ZERO.

There is no requirement to bid any higher - and you already knew that. So, why are you asking?

You strike me as a serious player, so I don't understand why you responded as you did. The fact that you said that you are bid zero for options shows a total lack of understanding of how the system works. Either that or misplaced sarcasm.

1) there is no one to clear such trades

2) There is no way you can hold the other party to the conditions of the contracts

3) You cannot buy options lower than the highest bid, so bidding zero and wanting to 'talk' is beneath you.

Mark

Sorry Mark, didn't mean to come off as sarcastic.

In my previous message I said that no demand = no IV. You seemed to take issue with that by saying that "in the real world, there is always a demand" and that "because of the system there is always demand for options."

However, it seeems we both agree that is not in fact true, since we both agree that there are options with zero bid, meaning options for which the demand is zero.

 

[OddTrader]

Quote from dmo:


By the same token, option IV is also determined by the law of supply and demand. It is determined by nothing else. It cannot be determined by anything else. That is exactly what IV is - the demand for an option relative to the supply.

When demand for IBM goes up relative to the supply, the price of IBM goes up. When demand for an OPTION rises relative to the supply of that option, IV goes up.

In other words, if option buyers become more anxious to buy an option, while option sellers DO NOT become more anxious to sell that option, IV goes up.

What else could possibly determine IV? How else do you think IV goes up and down? The IV fairy?

Volume is a completely separate question. If volume goes up, that does not necessarily mean that demand has gone up. It could have been supply that has gone up. The only way to know is - you guessed it - to look at implied volatility.

An increase in volume accompanied by a rise in IV means that demand has increased relative to supply.

An increase in volume accompanied by a drop in IV means that supply has increased relative to demand.

An increase in volume accompanied by no change in IV means that supply and demand have both increased equally.

Obviously you're a very experienced and knowledgeable trader/poster of options, who can explain something even beyond my comprehension! That's great!

 

[JJacksET4]

dmo,

First you said that IV was only demand. You said "IV is demand. It is nothing else."

Now, you say it is supply and demand. Of course, that makes a big difference. Still, I wouldn't agree if demand is viewed as far as how many people want something. If demand is viewed in terms of how much an item is wanted, then I can understand.

For example, compare a "high" demand IPod to a "low" demand Rolls Royce. The IPod can sell a million in the time that a few Rolls Royces are sold. The IPod is said to be "in demand", but that doesn't push the price up. But if you view demand as meaning more like someone is willing to pay $300,000 for the Rolls Royce, but no-one would pay that for the IPod, then I could agree.

IV is a simple calculation that shows the volatility implied based on what the stock price was, the strike price, the days remaining in the option, and a few other minor things.

I can easily find an option with a 100 IV that has very few trades and I can easily find an option with a 30 IV that has many, many trades and thousands of contracts traded.

Would you say the first option is in high demand? I wouldn't - I would just say someone is willing to pay a pretty high relative price for it - not that a bunch of people are lined up to buy the option.

I am a bit concerned that we are even having this discussion - IV is a very simple calculation that simply attempts to put a number to a relative price paid. For example if 2 options are both 50 strike calls on 2 different stocks that are each at $50 and both options are for 3 months and are standard contracts, etc. and one option is $500 and the other one is $300, IV helps put those into relative terms. A person could say that the first option is more "expensive", but that wouldn't mean it was a worse option to buy or a better one to sell either. There might be 1000 people buying the $300 option, but remember that there is a seller for every buyer as well.

--------------------------------------------
To all readers of this post:
--------------------------------------------
I have made another topic on the Options board entitled "Simple options IV test". I want to see how much confusion there really is over what IV is. Please check it out and give me your answers - they are simple multiple choice questions and I think they are all really quite easy (one of them could have a small trick to it). If you can't quickly get the correct answer to each one, I would suggest studying options and IV more.

JJacksET4

 

[OddTrader]

Quote from JJacksET4:

dmo,

First you said that IV was only demand. You said "IV is demand. It is nothing else."

Now, you say it is supply and demand.

...

IV is a simple calculation that shows the volatility implied based on what the stock price was, the strike price, the days remaining in the option, and a few other minor things.

I can easily find an option with a 100 IV that has very few trades and I can easily find an option with a 30 IV that has many, many trades and thousands of contracts traded.

Would you say the first option is in high demand? I wouldn't - I would just say someone is willing to pay a pretty high relative price for it - not that a bunch of people are lined up to buy the option.

I am a bit concerned that we are even having this discussion - IV is a very simple calculation that simply attempts to put a number to a relative price paid.

+1

Below is one of the many underlying aspects:
"If (commodity) stockpiles are large, demand can increase and drive uo prices with no visible volatility change. ...

When supplies are considered adequate, volatility tends to subside, even when demand increase. ...

This phenomenon is a good reminder that it is uncertainty about supply more than supply itself that boosts volatility", per Schap.

 

[dmo]

Quote from OddTrader:

+1

Below is one of the many underlying aspects:
"If (commodity) stockpiles are large, demand can increase and drive uo prices with no visible volatility change. ...

When supplies are considered adequate, volatility tends to subside, even when demand increase. ...

This phenomenon is a good reminder that it is uncertainty about supply more than supply itself that boosts volatility", per Schap.

I think you're confusing supply/demand of options (which is what determines IV) with supply/demand of the underlying, which is what Schap is talking about.