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0 pointstotalZero6y ago0 comments

A reasonably sized trade of wing options (far-OTM calls or puts) should be expected to move the volatility implied in the prices of options at and around that strike. I would call this "vol impact" or "skew impact." Go buy 5k AAPL Jul 250P tomorrow morning, and see what happens to the implied volatility of the offer on that contract by the time the market closes that same day.

Market makers are sensitive to wing trades, precisely because pricing skew is more of an art than a science. Trading away from spot can have a substantial impact on the way the implied volatility surface looks. And this can affect trades of other maturities and strikes.

Trading options, for me, is nothing like playing poker. Poker doesn't have an underlying storyline the way companies do. Nor are there catalyst dates in poker.

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hnews_account_16y ago

5k contracts is a massive trade my dude. At a multiplier of 100, that's a notional volume of 500k shares. That ought to move anything. Even AAPL as market makers balance their books. But I mean, generally these are one leg of a 4 leg option trade strategy. So it won't actually be a big net notional exposure in most cases (apart from having trades on the underlying to hedge themselves out).

pnako6y ago

It can make a big visible bump in a volatility surface, but experienced option traders are trained not to react like robots, but think instead of following blindly (otherwise it would be very easy to fool them, since it's a relatively illiquid market in which anyone can have a lot of leverage).

In that sense it's similar to poker; you don't have all the information to analyze what other players do. In this particular case, is it an informed trader or a noise trader?

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hnews_account_16y ago

pnako6y ago

In that sense it's similar to poker; you don't have all the information to analyze what other players do. In this particular case, is it an informed trader or a noise trader?

j / k navigate · click thread line to collapse