2.3.3 Bought/Sold

Another key feature of every option trade is whether each order is bought from a market maker or sold to a market maker. The hedging strategy of the market maker depends very heavily on aggregate bought/sold values for each contract on their books. Because this information would provide insight into where market participants placing long/short bets expect the market to move, this information is not provided for trades. Many services utilize a “naïve” assumption when calculating aggregate exposures, where they assume all puts are bought by traders and all calls are sold. This naïve assumption is decent for indices in bull markets, as people seek downside insurance and a cash flow from their long investments, but it is not very accurate for periods of high volatility and for single stocks. Others try to estimate whether a contract is bought or sold based on how close the trade price is to the bid and ask at the time of the trade, but this makes significant assumptions about trade dynamics that garner significant criticism. At Gammastrike, we utilize aspects of the option implied volatility to gauge relative demand for bought options over time, to try and provide some idea of how bullish options traders are at any given time, discussed in more detail in section 3.5 Volatility.