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Choosing Deep Out-of-the-Money SPX Options for Implied Distributions

Article Quant Q&A · Author: br0323
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Summary

The document asks why a deep out-of-the-money SPX call at a round-number strike can show substantial trading volume, and whether it belongs in data used to construct an option-implied risk-neutral distribution. The responses suggest checking open interest alongside volume, since volume alone does not show how established a position is. They also note that activity may cluster at round-number strikes and that deep out-of-the-money options can be more liquid than deep in-the-money options.

One response raises a possible explanation involving a box position if the corresponding put traded, but leaves that conjecture unresolved. The discussion offers practical checks rather than a definitive diagnosis of the reported trade. It does not provide a method for filtering quotes or validating implied volatilities, so inclusion in a distribution estimate requires further data-quality analysis.

Key ideas

  • Check open interest as well as volume when evaluating strike activity.
  • Trading may cluster at round-number strikes, especially for deep out-of-the-money options.
  • Deep out-of-the-money calls and puts may be more liquid than deep in-the-money options.
  • A corresponding put trade could be relevant to investigating whether a box position was involved.
  • The discussion does not establish why the reported call traded or whether its quote is suitable for an implied distribution.

Tags

OptionsDerivatives pricingUS marketsMarket microstructure
Full text
# Why are there so many S&P 500 call options selling with strike @1000?


# Why are there so many S&P 500 call options selling with strike @1000?












I am analysing option-implied RNDs and risk preferences for my masters thesis, so forgive me if I sound like a beginner in derivatives.

I use WRDS to download my historic options data. I am looking at SPX European Friday-settlement options with τ = 5 weeks, looking at a month by month nonoverlapping data. I'll give an example:

Information Date: Dec 13th, 2017

Exercise Date: Jan 19th, 2018

Index Close: 2662.85

Strike: 1000

Average of bid and ask for this strike: 1663.50

Volume: 250

Implied vol: 1.3931

The next available strike with volume > 0 was K = 2000, with strikes above having reasonable gaps and volumes. This is not the only dataset where I see this. Is this normal and is it okay to include it in the dataset to build the RND? I assume the answer will be related to trading fees, but just want someone with more knowledge to confirm.

Thanks.

## Answer by Quantoisseur (score 5)

https://quant.stackexchange.com/a/57420

I'm also currently working on analyzing option-implied RNDs. I'm no expert but a couple of comments:

- In addition to volume, you want to look at the open interest of the different strikes to conclude which prices are reasonable.

- Humans like round numbers so especially for deep OTM strikes you will see the bulk of open interest located at nice numbers.

- Deep OTM options tend to be more liquid than deep ITM options so when constructing the vol smile for the RNDs, you can use OTM call and OTM put IVs.

## Answer by CABLE (score 1)

https://quant.stackexchange.com/a/57424

Was the put of that strike also traded? If yes, then maybe somebody entered a box position to lock in the risk-free rate. If no, I don't know...

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.