Research

G. DeSimone: Assessing Option Demand from Signed Volume Order Flow

January 27, 2020

Supply and demand in option markets matter. A critical assumption of popular pricing models such as Black-Scholes is that investors are subject to a no-arbitrage constraint, which implies a perfect elasticity of supply. In reality, a market maker will not provide endless options contracts without charging higher prices. This demand theory of option pricing is a crucial piece in understanding the behavior of implied volatility surfaces.