Inferring Buyer- or Seller-Initiated Options Trades
Summary
The note asks how to estimate whether options trades were initiated by buyers or sellers, ideally for individual strikes and maturities. It identifies two approaches. A specialized exchange dataset used in published research classified daily call and put volume by trade initiator and whether the trade opened or closed a position. The answer does not say how to obtain that dataset, which limits its practical use.
As an alternative, the note points to the Lee–Ready trade-classification algorithm for estimating trade direction from market data. It cautions that such estimates contain noise and cites research applying the approach to options around earnings announcements. A second answer clarifies that every executed contract has both a buyer and a seller; describing a trade as buyer-initiated concerns which side initiated it, not an imbalance in the number of buyers and sellers. Price movement can reflect changing willingness to trade at prevailing prices, even though each transaction has two sides.
Key ideas
- Trade initiation describes which side prompted a transaction, while every trade still has both a buyer and a seller.
- A specialized exchange dataset can distinguish initiator direction and whether positions were opened or closed.
- The Lee–Ready algorithm can estimate options trade direction, but classifications are noisy.
- Researchers have used inferred options order flow to study trading around earnings announcements.
Tags
Full text
# How can one determine approximately what percentage of options trades are buyer-initiated vs. seller-initiated? # How can one determine approximately what percentage of options trades are buyer-initiated vs. seller-initiated? How can one determine approximately what percentage of options trades are buyer-initiated vs. seller-initiated? What measures of order flow are available specifically for options, preferably for individual contracts covering specific strikes and maturities? ## Answer by Tal Fishman (score 2, accepted) https://quant.stackexchange.com/a/2180 Pan and Poteshman (2006) were able to obtain a "unique dataset from the Chicago Board Options Exchange (CBOE) which breaks down the daily trading volume of both call and put options into four categories according to whether a trade is initiated by a buyer or a seller, and whether the initiator opens a new option position or closes an existing option position." I don't know where they got the data, but obviously this would answer your question. Otherwise, you could use the Lee and Ready (1991) algorithm to infer, with some noise, whether a trade is buyer or seller initiated. In fact, Amin and Lee (1997) did precisely this in a paper studying options trading around earnings announcements. ## Answer by Ram Ahluwalia (score 1) https://quant.stackexchange.com/a/2169 For every option bought there is an equal quantity of options sold. For example, when reporters say "stocks dropped because of heavy selling", this is strictly speaking impossible. For every stock sold someone is on the other side of the trade -- so stocks dropped because of heavy buying as well with equal intensity. What is happening is that the willingess to pay for stock (demand curve) has shifted to the left, therefore prices have dropped.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.