PT - JOURNAL ARTICLE AU - Richard Holowczak AU - Jianfeng Hu AU - Liuren Wu TI - Aggregating Information in Option Transactions AID - 10.3905/jod.2014.21.3.009 DP - 2014 Feb 28 TA - The Journal of Derivatives PG - 9--23 VI - 21 IP - 3 4099 - https://pm-research.com/content/21/3/9.short 4100 - https://pm-research.com/content/21/3/9.full AB - Implied volatility is a prime example of valuable information about an underlying stock that can be extracted from the market prices of its options. But the volatilitysmile illustrates the problem that there are many calls and puts, with different strikes and maturities, that can provide different information. How best to aggregate it is an important issue, especially for market makers. Some popular option-based measures, such as put-call ratios, simply add up numbers of contracts, with no adjustment for their different exposures to the factor one wishes to measure.In this article, the authors propose that investors classifyoption trades as buyer-initiated or seller-initiated, and useGreek letter exposures to combine them into an “aggregate delta order imbalance” (ADOI) to measure relative demand for upside and downside exposure to the underlying, and an “aggregate vega order imbalance” (AVOI) to measure demand for volatility exposure.Applying the approach with QQQQ options on the NASDAQ 100 index, tracking stock at intraday intervals, they show that both measures contain predictive information for the stock return and its volatility in the same period and in the periods immediately following.TOPICS: Options, security analysis and valuation, quantitative methods, analysis of individual factors/risk premia