Forums  > Pricing & Modelling  > Options vol & pricing - accounting for volume/OI of a contract?  
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Total Posts: 1346
Joined: Mar 2004
Posted: 2016-12-05 14:25
1) It could, yes. It can be useful to know how OI got to where it is, i.e. 1 big trade 1 day created all OI, or lots of small volumes adding up over time etc. Obviously we are assuming here that the listed market is bigger than OTC market, so that there's not too much other positions to swamp the listed market OI.

2) In general I'd think the answer would be yes. It'd make sense to focus a bit more on the risks he thinks can really hurt him given market view, than the ones that he's not worried about. Assuming he/she has confidence he/she can tell the two categories apart Smiley

Capital Structure Demolition LLC Radiation


Total Posts: 45
Joined: Nov 2013
Posted: 2016-12-05 19:56
1) (listed-vs-OTC) Yeah, that's a big 'known unknown.' I've wondered in the past if OTC/"dark" liquidity comes into the lit exchange(s) at semi-regular times of the trading session (esp near open & closing times of Asia/Europe/US sessions). If such was true, it might be of help to know the limited picture of what's going on in the lit exchange(s) would be 'adjusted' by the dark liquidity, and best bet is to avoid those times if one's strategy truly saw a repeated effect from going off of lit info and trying to trade then.
From other discussions of this topic, people have stated that OTC liquidity can take its sweet time staying exclusively-OTC, so that idea is very iffy. It's a layer cake, in all, anyway.

2) Ha, very lucid point you made there. Continuing on the 'volatility regime' notion, with the example of WTI Crude prices for the past several years, seems that once the OPEC headline in Nov 2014 came out and prices took a nosedive, a new vol regime was in play, and MMs had to substantially adjust (or replace) option pricing models


As an amateur, I'm trying to think of ways to model broad market observations in manner of a step-function, instead of a continuous one...sort of non-calculus-based Physics instead of calc-based. Acknowledging that the odds of divining a continuous, closed-form set of equations to capture the governing dynamics of market activity is virtually zero...from reading Emanuel Derman's papers on models, and history of finance, seems he's quite agnostic on the belief of finding such a thing. (Apologies if I've just butchered the real nature of approaching such topics, among more-traveled pros like yourself Smiley )

Seems in the end, more value is found getting off the mountain, down in the trench, and getting one's hands dirty.

"How be caught up in a game and have no idea of the rules." - C.S.
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