How Do Options Make Predictions?

Discussion in 'Options' started by kjb1891, Jan 29, 2009.

  1. kjb1891


    I've seen it numerous times where someone will something along the lines of "options are predicting an X% move for XYZ stock".

    How would you go about determining that? Do you look at specific signs from volume, open interest, IV, B-A spread?
  2. That's casino business.
  3. This is the Holy Grail of intelligent trading. Unfortunately, I am not at liberty to revile this phenomenon but I can tell you that once you discover it you will improve your trading by factor of 5 at least. it has been a corner stone of my research for more than 10 years. It is the only alternative to price/time series that has additional info that makes huge difference. Good luck to you. You are on the right track!
  4. Open interest is big. The strike with the highest OI is where the market is pointing. To a degree, this isn't a zero sum game. Buyers of options expect the market to get through that strike. Sellers are often 'hedged' like market makers who sell the option vs. buying the underlying stock.
  5. No, it's not it. It is a common belief, but it is not the diamond. It is the cave where the diamonds are but not the diamonds themselves.
  6. Construct put-call ratios from option volume initiated by buyers to open new positions. Stocks with low put-call ratios outperform stocks with high put-call ratios by more than 40 basis points on the next day and more than 1% over the next week.
  7. kjb1891


    MAESTRO, have you found volatility smiles/smirks to be of use in this regard?
  8. Enough with the metaphors. Give us something we can work with. Come on, man! :)
  9. The IV of the options allows you to calculate a standard deviation move for one day (or any other time period).

    When 'they' say the option prices are predicting such and such a move, they are referring to a one standard deviation move.

    FYI, by definition, the stock moves more than that one standard deviation roughly 32% of the time.

  10. I am sorry, I cannot. I am under huge obligations to my investors and my hedge funds. I can only tell you that for the first time on this board somebody found it by accident (or not). I have spent an enormous amount of time developing this subject and it is now our main investment strategy. All I can say that digging in this direction will give you the solution. IOW, time well invested! That is all I can tell.
    #10     Jan 29, 2009