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Why Options Open Interest Does Not Reveal Implied Volatility Pressure

Article Quant Q&A · Author: volquant
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Summary

The document asks for research on whether options open interest is related to implied volatility, proposing that heavy market-maker short positioning at a strike might lower implied volatility. The response highlights a basic identification issue: each open contract has both a long and a short counterparty. Aggregate open interest therefore does not show which participant holds which side of the position.

This is a useful caution when trying to infer dealer positioning or volatility effects from open interest alone. The exchange-level count measures outstanding contracts, but it does not identify trader type, direction of inventory, or the motivations behind trades. The brief response does not cite empirical studies, provide a formal model, or establish whether market-maker positioning affects implied volatility. Further analysis would require information that identifies positions or a defensible way to infer them, along with evidence linking those positions to volatility quotes. The document is a short conceptual reminder rather than a literature review or tested result.

Key ideas

  • Every open options contract has both a long holder and a short counterparty.
  • Aggregate open interest alone does not identify which side market makers hold.
  • The document cautions against inferring dealer positioning directly from open-interest totals.
  • It provides no empirical study, model, or evidence that open interest changes implied volatility.

Tags

OptionsVolatilityMarket microstructure
Full text
# Relationship between Open Interest and Implied Volatility


# Relationship between Open Interest and Implied Volatility












Reference Request for any papers/articles that test the relationship between options open interest and its implied volatility.

E.g. I would assume that a high market maker short interest on a strike will lower the implied volatility. But I wanted a more formal way to model it.

Thanks.

## Answer by Newquant (score 0)

https://quant.stackexchange.com/a/79478

You'll need to determine who is shorting. 1 open contract is long to one party and short to the counterparty.

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