Is there publically available option pricing model or theory that considers open interest/volume % change?

I believe that laws of supply and demand effect options like any tradable good. However, I have a hard time finding mathematical model showing the relationship between classic Greeks and open interest and options volume % change.

Ultimately if someone sells/buys option far in the money or out of money it will affect IV which then moves the option price, IV isn't the mesuring size of the commitment am I correct?

I would like to predict changes in asset prices based on changes in traders commitment (similar to futures COT). Let's say we have huge surge open interest in out of the money puts or calls we can draw a concussion that market thinks asset price going to make a large move. Based wherein the option chain volume changes we should be able to predict the direction as well.

Is there an existing theory around this?

  • 1
    $\begingroup$ The general idea you are referring to is called Demand Based Option Pricing docs.lhpedersen.com/DBOP.pdf It has been shown that there is some effect there, but it does not completely invalidate arbitrage based option theories. Demand can distort prices somewhat from the theoretical value. $\endgroup$ – noob2 May 9 '17 at 4:39
  • $\begingroup$ Ah thanks. My idea is to use volume & OI change mainly as validator/invalidator for taking a directionally biased position. Actually to opposite direction. I took a look at my losing trades one thing is clear. Never sell a put when lot of people suddenly want to buy it, even if you getting extra premium... $\endgroup$ – Kimmo Hintikka May 9 '17 at 5:33
  • $\begingroup$ Stop loss /hedging has covered me for any outsize losses, but I feel that sudden volume changes indicate that major changes (above 1,5 standard deviation) are more probably than IV calculation would let me to believe $\endgroup$ – Kimmo Hintikka May 9 '17 at 5:41
  • $\begingroup$ Not an exact answer but some commentary on OI here in this post may be useful. quant.stackexchange.com/questions/33327/… $\endgroup$ – amdopt May 9 '17 at 11:56

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