Vol and Order: Special Options Unit

Join Jeff Praissman with Market Chameleons’ Dmitry Pargamanik and Will McBride as they break down the hidden signals behind single-leg options, zero-DTE trades, and expiration hotspots. Learn how retail and institutional traders use volume, skew, and implied volatility to shape market expectations in real time.

Summary – IBKR Podcasts Ep. 285

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. This is Jeff Praissman. It’s my pleasure to welcome back for our monthly podcast Market Chameleons, Dmitry Pargamanik and Will McBride. Hey guys, how are you? 

Dmitry Pargamanik 

Hey Jeff, how are you? 

Will McBride 

Hey Jeff. Thanks for having us back. 

Jeff Praissman 

Ah, my pleasure. And we just got done with a great webinar on single leg options, and I’m excited to take a deeper dive—or a different dive, as we like to say—on this podcast format that we get to do every month with you guys. I’m just gonna kick it off. Dmitry and Will, could you explain what makes single leg index analysis particularly valuable compared to analyzing multi-leg strategies? And also, how does isolating these trades provide clear signals about the market? 

Dmitry Pargamanik 

Yeah, thanks. So when we talk about the single leg options, these are option trades. These are orders that were entered in as a single leg order—either a call or a put, buying a call or put—and executed like a single leg order. And that’s different from multi-leg trades because you can enter in a trade, you could enter in a call spread, a put spread, a butterfly, where all the legs have to get executed simultaneously. 

And when we look at strategies that are multi-leg trades, that could be telling us something completely different—signaling a different type of trade or expression in the market. And if we isolate those out and just analyze the single leg trades, then we can really get a sense of how people are using options differently. 

And then take that trading volume and analyze it in itself to get an indication: what are people doing? How are they using options? Where are they trading, and how is it impacting the option premiums and implied volatility from those trades? So that would be the important piece—to separate that volume so you can get a clearer signal of how people are using the options. 

Jeff Praissman 

And we often hear about put-call ratios. Market research goes deeper into volume distribution by moneys. How can traders interpret the difference between heavy volume in far out-of-the-money options versus at-the-money options? And what do each of them typically signal? 

Dmitry Pargamanik 

Yeah, that’s a good question. You could have a lot of calls trading, a lot of puts trading, or an even amount. And the places where those options are trading make a big difference.So when you’re talking about, let’s say, a lot of volume around the at-the-money options—options with strike prices close to where the spot price is—usually that happens in directional trades or in volatility-type trades, where people are expressing their opinion on the implied volatility of the stock. 

As you go out further and further, those types of options—let’s say wings or tails—are something a little bit different. People are no longer expressing an implied volatility opinion as much as expecting a larger stock move. In the case of a tail, it could be for protection, or an expectation of something not related to just market gyration back and forth, but more of a large move to that strike. 

So by looking at the moneys, those are typically different types of expectations and behaviors. They could be either very speculative or a hedge to protect from a violent, unexpected, or unusual movement. 

Jeff Praissman 

And when analyzing expiration hotspots, what patterns have you noticed around, say, economic events like FOMC meetings or CPI releases? And how can traders use this information tactically? 

Dmitry Pargamanik 

Yeah, so when we look at different options expirations, what we look at is: what expirations are traders concentrating on? What are they doing, and what can cover that expiration? 

So perhaps, like you mentioned, if there’s an upcoming event in the market that is known—an upcoming release—we can get a schedule of Fed meetings and so forth. What are people doing in the options market? What are their expectations around that event, and how much trading is there? Is there a concentration of heavy volume in a particular expiration that, let’s say, covers the Fed meeting? Then we can look at that to see: what’s the distribution of that volume, and what are people signaling in terms of their expectations of a volatility move? Or is there a particular strike or option type that is seeing some concentration or unusual volume? 

Jeff Praissman 

And Market Chameleons developed methods to differentiate between retail and institutional order flow in index options. What are the most significant behavioral differences you’ve observed between these two groups? And maybe as important, how can retail traders benefit from understanding institutional flow and positioning? 

Dmitry Pargamanik 

Yeah. At least from just an observation from day to day, what’s interesting is that we see all types of traders participating in something like the SPX index: small traders, retail traders of different sizes, and even institutional traders. Every day we see volume coming from all types of traders. 

And just from eyeballing and looking at the patterns, it looks like the small and retail traders tend to go for zero DTE options almost on a daily basis. That’s what we see: zero DTE—zero days to expiration—options that expire same day, so you don’t have the overnight or carrying risk. 

Typically, we also see the larger trades going out a little bit further—those would be going out further months. They could be based on strategies: buy-write strategies or strategies of hedging overall portfolio risk. You tend to go out further, especially if you’re trying to hedge it out in time based on some expectations or news. 

So we see the larger trades happening in options that are further out—not necessarily leaps, but not zero DTEs all the time. That would be the first observation. 

And I think for any trader—whether retail or professional—it’s important to know the market dynamics: what’s trading, what people are doing. It’s like showing up and you have a board of all this information that is part of your decision-making process. Knowing the different players, what they’re doing, how it’s impacting markets, where there is concentration or heavy volume, and who’s doing it—it’s all important for any trader to understand what’s going on. 

Jeff Praissman 

And that kind of leads me into my next question. When you identify unusually high volume in specific strikes, what other factors do you investigate to determine whether it’s hedging, speculation, maybe part of a larger strategy that’s not immediately obvious—or is it sometimes just that you don’t know? 

Dmitry Pargamanik 

Yeah. No—for, yeah—you’re drawing inferences. You don’t really know the intent of the other side, because you don’t even know who the other side is. You can see the size of the trade, but you don’t know who the person is on the other side. You never know that. 

But you can draw some inferences based on other related key metrics. And one is implied volatility: how are the trades impacting the option premiums? Is implied volatility going up? Is it going down? Is it impacting skew? Is it impacting trading in other related options? Is it making the tails move up, down, flatten the skew? So all this plays into the overall inference of what you think is going on. Taking the trading volume and looking at other surrounding data paints you a better picture: how much trading is going on in other places, and how it’s impacting the option premiums. 

Jeff Praissman 

And implied volatility is such an important factor of options, and you just briefly spoke on it. But how is the relationship between implied vol and single leg options—has it evolved in recent years? Are there any predictive patterns that traders can use, or should be watching, that they can extrapolate data from? 

Dmitry Pargamanik 

Yeah. If we just look at implied volatility—when you look at any product from day to day, you get used to how the implied volatility looks from day to day in a particular stock, and you look at the skew. 

In an index, it always looks a little bit similar: the vertical skew, where option implied volatility to the downside is always sloping higher. Because as the market goes down, the expectations are usually built in that volatility will start increasing. And if the stock market goes higher, the implied volatilities are usually sloping down, with expectations volatility will decrease. 

So that’s a typical “smile” you see in the SPX. But it does move around. Things shift. It could become flatter, it could become steeper. Those are things you want to keep an eye on: how it’s moving around, what’s making it move steeper, or what’s making it flatten. 

Jeff Praissman 

And Dmitry, our listeners love real situations—and you’ve been involved with options for what, the last 30-plus years. I wonder if you could take us through maybe a recent, or not so recent, case study where you were analyzing single leg option volume and it provided an early signal about market direction that wasn’t reflected in the underlying price. Just a real situation you can share with our listeners. 

Dmitry Pargamanik 

Yeah. So as far as index options go, like something in the SPX—it represents the S&P 500, the market. Nobody knows where the market’s going to go. Nobody should. That seems impossible for one person, or any institution, to really know where the market’s going. 

But some of the things we do—or you can look out for—is how implied volatility is changing. Because implied volatility starts to signal that something is expected to make the market move more than usual. Implied volatility is an indicator of price movement. 

And the skew, and the horizontal skew—when it shifts higher, and implied volatility starts to increase on shorter-dated options—that could signal something is indicating that the market thinks stocks are going to move. The market’s going to move in either direction. 

So one: the implied volatility itself is the indicator of market expectations, whether volatility is going up or volatility of the market is going down. 

Jeff Praissman 

And I think we should skip question eight. It’s a little too pluggy for both of us. You guys obviously have a bunch of option tools and we do too. So I’m gonna skip that, if that’s all right. 

Dmitry Pargamanik 

Yeah. 

Jeff Praissman 

Looking at different products—whether you’re talking about comparables, let’s just say a bunch of technology stocks or a bunch of indices—do you look at volume distribution across them to see how they vary? For example, SPX volume is greater/less than NDX, greater/less than RUT. Or Apple’s greater/less than IBM, greater/less than Oracle. What insights can traders gain by comparing these patterns between like products? 

Dmitry Pargamanik 

Yeah. For products like that, actually the SPX has by far the most volume. The other ones don’t have much volume compared to it. When we look at them side by side, SPX just swamps all of them—they’re not close. 

If we look at SPY or QQQ, maybe they’re a little closer, but the other ones aren’t that close. What we do is look at volume on a relative basis—relative to itself. Is it moving up relative to everything else? 

If volume is moving up relative to itself, and volume across the board is doing that, then it’s like the whole market—volume is increasing everywhere. But if you’re looking at a particular product, like you said, where the volume on a relative basis—something like Apple or IBM—is moving higher for just that particular stock, but we’re not seeing the same thing elsewhere, then maybe you pay attention to what’s going on there. 

It’s not systemic or market-specific; it’s stock-specific volume. Something’s happening in that stock. 

Jeff Praissman 

So it seems like it’s more percentages. Like, if stock A usually trades 20% of the volume of stock B and they both go up, it makes sense. Or if they both go down, same thing. But if stock B all of a sudden goes up, and stock A doesn’t—or vice versa—then all of a sudden it hits the radar. Maybe we should drill down and look at some other factors. Obviously you’ve gotta look at a ton of data to be sure, but it catches your attention, it sounds like. 

Dmitry Pargamanik 

Exactly. 

Jeff Praissman 

And looking at today’s market environment—you talked about the zero-dated option expirations and some longer-term ones—but what are some of the most noteworthy patterns you’re currently seeing in single leg index option volume? And what might these suggest about institutional expectations for the market? 

Dmitry Pargamanik 

Yeah. From day to day, there’s a lot of volume in the zero DTEs. By far, there’s more volume in the zero DTEs than in other expirations. That’s what we typically see. But when you’re looking for something maybe different—something unusual that happens from day to day—it could happen intraday. 

Dmitry Pargamanik 

And you’re looking for a combination of the unusual volume and what the impact was—price impact or implied volatility impact due to that volume—and then trying to take it from there. So it’s very dynamic. Whatever happened yesterday may be different today; it could be different in an hour. 

So I couldn’t give you an answer like, “What’s unusual right now?” But that’s the starting point: the two key metrics are really volume and price impact. 

Jeff Praissman 

And this has been great. It was a great webinar earlier today, and as always, a great podcast. Any final thoughts you’d like to share with our listeners? 

Dmitry Pargamanik 

Yeah, I think that as any trader, one of the things you want to do is have tools in place to help with your decision-making process. Especially if you want to know what’s going on, what other people are doing, and what that indicates relative to market expectations. 

Looking at these single leg options—because they’re liquid, have a lot of trading going on, and reflect systemic market expectations—it’s something you should consider watching from day to day in your trading decisions. 

Jeff Praissman 

Will and Dmitry from Market Chameleon, thank you guys so much for stopping by. For our listeners, you can find more from Will and Dmitry at their website, marketchameleon.com, or on our website under Education. They’re frequent contributors to webinars and podcasts.  You can catch their webinar the second Tuesday of every month. And once a month we put out a podcast as well. You can go to our site, click on Podcasts, and see all the past ones as well as the upcoming ones. 

Guys, thanks a lot—really appreciate you swinging by the studio.