stocks indicator
Wednesday, March 10th, 2010
Can Option prices be an indicator of a stocks future price.?
If I want to buy a particular stock is there some benefit in viewing the options contracts for that stock. Often I see either alot of call or put activity at a strike price with the previous or future contract period showing “normal activity”.
Potentially, yes. Going back to 1993, Charles Lee of Cornell published a paper that found option price movements trading prior to an earnings announcement might be able to foreshadow the direction of the earnings surprise (earnings result versus consensus). On a related topic, other have found that a high level of open short interest in out of the money calls may predict future price appreciation, etc.
The reality is, option prices are determined by supply and demand, and options represent a very easy way for someone with an informed view to take a leveraged view on the underlying stock. So it is certainly conceivable that there is information there.
Here are some papers on the topic:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=352141
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=368980
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=5442
http://home.ust.hk/~kachan/research/stock_opt.pdf
Hope this helps!
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