One Leg at a Time: Analyzing Option Trade Volume

Dmitry Pargamanik and Will McBride, the cofounders of Market Chameleon, join IBKR’s Jeff Praissman to discuss researching single leg option trade volume and how to interpret the results. This podcast is a follow up to their insightful webinar, “Analyzing  Single Leg Trade Volume ”.

Summary – IBKR Podcasts Ep. 214

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman 

Hi, everyone. My name is Jeff Praissman with IBKR Podcasts, and it’s my pleasure to welcome back, for our monthly podcast, Market Chameleon’s Will McBride and Dmitry Pargamanik. Hey guys, how are you? 

Dmitry Pargamanik 

Hey, Jeff. How are you? Thanks for having us. 

Jeff Praissman 

Oh, my pleasure. We just wrapped up a great webinar on analyzing single-leg option trades, and I’m excited you guys swung by the podcast studio. We’re going to do—I don’t know if “deeper dive” is the right word—but I guess a different dive. I highly recommend anyone listening to this podcast check out the webinar as well. 

I think we might as well get started if you guys are ready. 

All right. So, I’d like to start off with just some basics on breaking down trade volume. First of all, what can the percentage of calls versus puts traded that day or that week tell the trader? 

Dmitry Pargamanik 

Yeah. When we’re analyzing option volume and option trades, it’s a little bit different than just looking at stock volume because options have different contracts. So, when we look at the total volume, you want to break it down and see what’s going on there. 

When we talk about option contracts, there are calls and there are puts. Just breaking those down into percentages can let us know—are traders and users of options using calls and puts evenly, say 50/50, or do they have a preference for calls or puts? Is it mostly call options or mostly put options? 

That could point us to where that trading volume and order flow are heading. Sometimes, you’ll get much more call volume than put volume, and that might even be normal for certain stocks. If you track the benchmarks and suddenly see something unusual happening—like 90% of the volume in puts versus calls—that might alert you to research it further because it’s unusual. Even if the volume itself isn’t out of the ordinary, the order flow and the way people are using options may have dramatically shifted. Tracking the percentages or proportions of calls versus puts can alert you to that. 

Jeff Praissman 

And kind of along the same lines, does it matter if the option trades are buys or sells for analysis purposes? 

Dmitry Pargamanik 

When we look at option order flow, of course, every trade has a buyer and a seller—that’s needed for a transaction. A lot of traders who study the order flow and the tape are trying to determine how is that order flow coming into the markets from end users? 

The assumption is that market makers are providing liquidity, so traders look at how the “takers” are behaving. Are they coming in more aggressively from the buy side or the sell side? Where is the heavier volume order flow coming in? Are they buying premiums—buying options—or selling options? 

If you can model that out and determine how the order flow is coming in, that could impact how you strategize, place orders, and approach your trades. As a trader, the more information you have—and if you know the markets better than everyone else—it gives you a certain advantage. 

It’s very common for traders to try to model that out and determine whether order flow is coming in mostly from the buy side or sell side. 

Jeff Praissman 

One of the things I’ve noticed when I’m looking at option volume is, let’s say someone trades a thousand contracts in a day, and there are four expirations—it’s generally not 250 contracts per expiration, evenly spread out. It tends to congregate around a few expirations. 

How can traders use these volume spikes in particular expirations or even specific strikes? How can they use that information to guide their analysis? 

Dmitry Pargamanik 

That’s a good point. When we look at trading volume, we can break it down into calls and puts, but options also have different expirations. 

You could have short-term, shorter-dated expirations, or longer-term expirations. You want to see how trading volume is distributed among those expirations. Is it evenly spread, or is there a preference for particular expirations? That can tell us a little about how people are using options and the type of risks they’re targeting. 

Sometimes, volume is very heavy in shorter-dated expirations—sometimes even 0DTEs (zero days to expiration). In certain products, 0DTE options are the busiest because people are using them for their outlook on that particular day—whether that’s direction or volatility. Other times, you’ll see concentrated volume in longer-dated expirations. 

You might see an expiration that’s two or three months out with unusually high volume. Why would people start looking at that? It could be tied to a particular event—earnings, an announcement, or maybe a biotech stock awaiting FDA approval. Looking at expirations and volumes can give you insight into what traders are focusing on and what types of risks they’re targeting. 

Jeff Praissman 

And, as we all know, options are complex instruments. Unlike trading stocks, where Trader A buys a share of XYZ and Trader B sells a share of XYZ—resulting in a net volume—you can’t look at option volume quite the same way. 

With stocks, you can simply say, “x amount of shares traded per day,” and leave it at that. But with options, as we’ve discussed, there are different expirations and different strikes. 

So, it’s obviously not the same thing if Trader A buys an at-the-money December call while Trader B sells an out-of-the-money February call. Those are very different trades, with very different Greek values and philosophies. 

What do you guys look for regarding the Greeks when analyzing single-leg option trades? 

Dmitry Pargamanik 

That’s a very good point. Trading 100 contracts of one option isn’t the same as trading 100 contracts of a different strike or expiration. With stocks, 100 shares is always 100 shares—but not with options. 

To convert the option volume into a risk metric, we use the Greeks. For example, we can convert the volume into its delta risk, gamma risk, vega risk, or theta risk. That can tell a different story. 

For example, is there a lot of directional risk in a particular option? Then it’ll have a large delta. Out-of-the-money options, on the other hand, may have very low delta values, meaning they won’t move much unless there’s a significant move in the underlying stock. 

If you look at vega, which measures sensitivity to implied volatility, you’ll find that longer-dated options have much higher vega risk. They’re more sensitive to changes in implied volatility compared to short-term options. 

By converting option volume into their Greeks—delta, gamma, vega—you can paint a different picture of how traders are using options and what types of risks they’re targeting in aggregate. 

Jeff Praissman 

And could you dive a little further into delta analysis? You mentioned wings and tails earlier. Let’s say you saw a huge amount of really out-of-the-money calls traded. No one’s saying you’re predicting the future, but what could that suggest a trader might be expecting? 

Dmitry Pargamanik 

Yeah. When we look at options, another way we can analyze volume is by breaking it into buckets based on deltas. Are traders targeting at-the-money deltas, out-of-the-money deltas, or in-the-money deltas? 

If we see an unusual concentration in out-of-the-money calls—that’s a wing or tail—it doesn’t typically happen. It could indicate something significant. You’d ask, “Why is this happening? Who’s doing it?” It could reflect a change in sentiment or order flow. 

You’d also look at skew to see if there’s some reason—like news or an event—that’s making traders believe there could be an unusual upside move. Monitoring that could give you new information about what the market is signaling. 

Jeff Praissman 

And I actually want to take a second to tie in what we’ve talked about so far and just point out to our listeners a trader could buy 50,000 deltas by selling puts or buy 50,000 deltas by buying calls, and the analysis would look very different, right? They’re either buying the vol or selling the vol. So, it really seems like it’s important to look at everything going into it. Just focusing on one piece doesn’t really tell the full story for options, which, as we’ve discussed, are fairly complex instruments. 

Dmitry Pargamanik 

Exactly. What options were used to get that 50 delta, and how did they do it? 

Jeff Praissman 

Right. 

Dmitry Pargamanik 

It’s very important. 

Jeff Praissman 

And one thing I was thinking about the other day—there are currently 18 option exchanges in the U.S. Most options trade on almost all of them, if not all, right? I mean, there are still some single-listed options, but very few. For the majority—especially the top 100 or 200 stocks—I’m sure they all trade on every exchange. 

Do you factor the exchange where the contract trades into your analysis? And if so, why? It’s the same contract, right? So how can that help the trader? 

Dmitry Pargamanik 

When we look at the options exchanges, it’s very fragmented. You can trade on, like you said, 16 or 18 different exchanges at this point. One of the things you may want to look at is if we analyze the volume and trades, is that volume distributed evenly, or is there a concentration of volume on one or two exchanges? 

That can be important, especially if you’re a trader trying to determine where you get the best price execution or where you’re more likely to get an immediate fill. If you don’t get an immediate fill, there’s a bigger chance the stock moves away from you, and you miss your trade. 

So, if you’re routing an order to a particular exchange, you may want to see where the volume and trading activity are concentrated. The more trading volume on an exchange, the higher the probability you’ll get a better fill in between the markets, a faster fill, and better execution. 

When it comes to routing orders directly or assessing where to trade, tracking where the volume is concentrated can really benefit traders. Good quality execution translates into profits, fewer expenses, and minimizing losses. 

Jeff Praissman 

I’ll take a second just to plug the IBKR Smart Router, which takes option and stock orders, pings all the lit exchanges, and works to get the best economic outcome for the trader. 

And, Will and Dmitry, in some of our past podcasts and webinars, we’ve discussed different types of traders—small, retail, professional, institutional. Is trade source something you take a look at and analyze as well? What can that tell you about the volume? 

Dmitry Pargamanik 

When we look at order flow and trades, there’s limited information on the tape, but you can try to make inferences from what’s available. 

For example, if you see contracts that look like a one-lot or two-lot with not much volume around them, you might bucket that off as small or retail trades. Then, if you see very large blocks or orders—300, 400, 500 contracts—that’s different. That’s not someone with $2,000, $3,000, or $5,000 in their account. It’s more likely an institutional trader or someone with a much larger account. 

By bucketing trades into retail-sized or institutional-sized, you can compare and gain insights into what types of traders are participating and what they’re doing. Why is there an increase in retail trades in a particular stock all of a sudden? It could be something on social media, a news event, or something mentioned on TV. 

Understanding where the volume is coming from and who’s participating is important. Retail traders, for example, are often reacting to news that’s already public, so they’re not typically seen as the “informed” traders. Institutional traders, on the other hand, might act differently. 

If you see a big trade—say, someone just put up 1,000 contracts—you might approach that research differently. Why did it happen? Where did it come from? 

Jeff Praissman 

And kind of going back to implied volatility, what can the relationship between the change in implied volatility from the previous day to the day you’re analyzing tell a trader? 

Dmitry Pargamanik 

We’ve been talking a lot about volume and trading activity. When we look at options, though, you want to know how is the trading volume impacting the option value? 

Option value is dynamic. It can change because of decay, delta movements, or implied volatility changes—even without trading volume. 

To figure out how volume impacts option value, you can compare the implied volatility from the previous day’s close to the current implied volatility. That can give you an idea of whether trading volume is pushing the value of the option higher or lower. 

It’s one way to look at volume and price action together and see how they’re correlated. 

Jeff Praissman 

And I want to leave off with one final question regarding opening and closing trades. Is there a way for traders to know, when analyzing, if a trade is opening or closing? 

Dmitry Pargamanik 

I mean, that’s not information you get directly from the OPRA feed. You don’t see whether someone is opening or closing a trade—that’s not part of the trade data that’s delivered. 

But in certain instances, you can make inferences. For example, if you see a big trade—let’s say 1,000 contracts—and the open interest was zero that morning, you can infer that it’s an opening trade because there’s nothing to close out. Open interest updates once a day, so if it’s zero, there’s no existing position to close. 

If there’s already a lot of open interest and you see heavy volume, you can’t always tell if it’s opening or closing. You’d need to wait until the next day, when the open interest updates, to see the change. If open interest increases, that suggests more positions were opened in aggregate. 

But on the trade tape itself, you don’t see whether one side is closing or opening. 

Jeff Praissman 

Got it. This has been great. I want to, again, thank you guys for coming by. I love doing these monthly podcasts and webinars with you. 

For our listeners, you can find these podcasts on our website, YouTube channel, Spotify, Apple Music, Amazon Music, and all the usual platforms. They’re well worth a listen for anyone interested in options or the economy in general. 

Guys, have a great holiday, and thanks again. 

Dmitry Pargamanik 

Thanks, Jeff. 

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