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For example, suppose you are very bullish on a stock and you wanted to purchase the maximum amount of call options.

Let's say the current total call open interest is 50,000 and you purchased 100,000 contracts, making the new open interest 150,000

Would this order be filled and how would it affect the price of other strikes?

  • Someone has to sell you those contracts. They would probably decline to write more contracts than could be dealt with. – zeta-band Sep 20 '18 at 17:00
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    Ah, youngsters. Look up the Powsche / Volkswagen story. Porsche tried a takeover (VW being 60 times their size (!)). They did that by.... buying more call optons than there were stocks floating. Price went UUUUUUUP. So, it is possible ,) Especially if you use out of market instruments, not exchange traded options (so they do not see it coming). automobilemag.com/news/porsche-and-volkswagen-what-happened – TomTom Sep 20 '18 at 17:08
  • @TomTom - The blindside of Volkswagen was facilitated through the purchase of shares and calls. In order for Porsche to acquire the calls, there had to be willing call sellers. That's the gist of it. The mechanism of Porsche's plotting to takeover Volkswagen has no relevance to the OP's question about order execution. – Bob Baerker Sep 20 '18 at 17:56
  • @TomTom what are "out of market instruments" – JDM Sep 21 '18 at 1:03
  • OBVIOUSLY instruments taht are not on the market. You can not amass hugh options on an options exchange - it will be seen. But you can sign contracts with banks, i.e., that do not show up on some open interest ticker. – TomTom Sep 21 '18 at 6:38
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It's a bit of an if/then maybe answer.

Would this order be filled? In order to get a BTO execution, you need one or more counter parties willing to transact at your price. If it comes from STC parties, OI does not increase. If it comes from STO parties, OI will increase. So your 100,000 BTO position may or may not increase OI by 100,000. The only way that OI will increase by 100,000 is if all counter party selling is STO.

The current OI doesn't have a direct effect on your order other than providing more liquidity, making it more likely that a current short position can be enticed to STC to you.

Another way that you might get filled is if there is a seller of the same series put. If the premiums are attractive enough to allow a risk free arbitrage (ignoring Pin Risk), the market maker or floor trader will execute a Conversion to accommodate both transactions. The MM buys the other guy's puts, sells the calls to you and buys 100 shares per contract, laying off all of the risk to the two option counter parties.

Since this is a large order, as you pay up for the options, it's going to raise the IV and premium unless all of your BTO volume comes from current OI and it was looking to sell at current price. That's a long shot under normal circumstances and can't be the case here since your transaction size is greater than the Open Interest.

If your call's IV rises, the same series put's IV will rise. The IV of other strikes might be affected, depending on news, if any. If the MM senses something and wants to hedge more of his risk, B/A spreads will widen and the IV and premium of other strikes may increase somewhat. If this is just a one off order, maybe not much, if any IV increase elsewhere.

The only other limiting factor would be Position Limits. For the most part, that would not affect you since there aren't many underlyings where the Position Limit is under 100,000 contracts.

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Open interest is often not the best measure of liquidity. The first contract traded of a particular specification is always larger than the open interest (0).

Second, in your example you do not know that the new open interest would be 150,000. It could be the case that some of the sellers are existing holders. The open interest after a hypothetical trade could be as low as 100,000.

A market maker would likely buy the stock to hedge the delta (the sensitivity of the option price to the price of the stock). Depending on the liquidity of the stock, this may impact the price of the stock. The next priority of the market maker would likely be to hedge the second order sensitivities like Gamma (sensitivity to the squared change in stock price) and Vega (sensitivity to change in implied volatility). The second order sensitivities can be hedged using calls or puts. If puts are used, the market maker would need to buy additional stock to hedge the negative delta. The purchases of calls and puts would likely push the implied volatility higher.

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