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Strategies & Market Trends : Waiting for the big Kahuna
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To: Haim R. Branisteanu who wrote (10181)11/22/1997 1:13:00 PM
From: Mark Adams  Read Replies (1) of 94695
 
Good article, describing the relationship of increased OI to increased Volatility.

I believe the part about the otherside not honoring the trade applies more to OTC options (options which aren't exchange traded) and perhaps FX hedges.

This vega thing is important. It looks to me that discontinuties cause lags in options prices changing in relation to underlying issues, as the Options dealers shift risk onto the options purchasers, resulting in spikes in Implied Vol. Implied Vol drops back to more 'normal' levels as the dealers complete their transfer. (they've now completed their adjustments following the 554 drop of recent).

For anyone looking to profit on the upside by buying calls during a nasty drop, this stacks the decks against you (or me in this case). So if you're going to hedge, do it now, and then sell after the IV jumps.

Puts on TDW anyone?
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