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?

  • $\begingroup$ Can you be more specific? What do you mean by "% buying" and "% selling"? $\endgroup$ – Ryogi Oct 15 '11 at 0:29
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    $\begingroup$ @RYogi I edited the question to reflect what I believe is the OP's intent, namely disentangling buyer vs. seller initiated trades and obtaining/estimating order flow for options. I also removed the superfluous example. $\endgroup$ – Tal Fishman Oct 17 '11 at 15:11

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.


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.

  • $\begingroup$ But each trade is either buyer or seller initiated, no? Open interest doesn't help in answering Beatrice's question. Instead, one needs order flow. $\endgroup$ – Ryogi Oct 14 '11 at 23:32
  • $\begingroup$ I disagree. Markets are clearing -- quantity sold = quantity purchased. Let's say I post a limit order to sell an option on the inside ask, and someone else posts market order to purchase an option. Both buyer and seller "initiated" the trade. This is the same fallacy as saying "money flowed into stocks" today. Money only flows into the stock market on an initial public offering -- not on trades on the secondary markets. Maybe Beatrice is asking to estimate the demand and supply curves for options, or measure the cumulative tick. $\endgroup$ – Ram Ahluwalia Oct 14 '11 at 23:55
  • $\begingroup$ I read the question from a microstructure perspective: "Buyer/seller initiated trade" is common parlance for price taking in a certain direction, in contrast to providing liquidity with a limit order. This decision is an execution decision. Switching from cash to equity (or vice versa) is an allocation decision. $\endgroup$ – Ryogi Oct 15 '11 at 0:21
  • $\begingroup$ Got it. In this view, you are correct that order flow would be req'd. $\endgroup$ – Ram Ahluwalia Oct 15 '11 at 0:27

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