Which leads: Options or Equities?

Discussion in 'Trading' started by jonnysharp, Sep 7, 2009.

  1. Ive debated this topic with myself for awhile now and I'm interested to hear from the more experienced traders opinions. I know on a larger timeframe options can lead equities, just about every major decline recently was priced into options before it happened. Atm, options are pricing in another fall as evidenced by the VIX and the premium on put options. Also we know informed/inside traders are more likely to use options which should give the most dominant lead-lag effect over stocks, but this doesn't necessarily occur on a minute by minute basis. Regarding intra-day trading, say a stock is trading flat but then the stock call options start getting bid up, should the stock follow? and vice versa for a stock moving, whilst options stay flat? obvious answer is yes, but to what effect does it play out? do any of you stock day trading guys watch the corresponding options?

    thanks, jonny.
  2. 1) Don't debate. Make up your mind and do "something".
    2) It depends. Generally, you would expect stock-buying from delta-hedgers who shorted the options.
    3) It depends. There could have been some type of news release where people are selling out of option positions because the "uncertainty" has been resolved and implied volatility is cratering. :cool:
  3. Regarding Nazzdacks comment to "do something".

    I say this, check the stocks on your watch list against the strike price with high open interest and see where they close on option expiry. (sometime they close right smack in the middle of two strikes)

    Imo, the most important week is option expiry week, it's easy to be fooled by news this week, the equity price may spike yet return to strike price with highest open interest.

    I have found the equity price may continue it's trend the Tuesday after expiration Friday (the trend is absent during options expiry week)

    Look at a chart of the stocks low for the month compared to it's strike price.

    Imo, some stocks are ruled by the option traders and others, although they have option volume, it has no effect. *Depends*

    Fwiw, while studying reversals, I noticed plenty of failed reversals on stocks with high option trading during expiration week.
  4. interesting comments nutmeg, thanks.

    looks like there is a lot of relationships going on between stocks & options by the sounds of it.
  5. mm hedge their option writings by taking the other side. They consistently adjust their position to offset any potential losses resulting in a market price that is less than the strike they sold.

    just a thought ;)
  6. I've done just fine never looking at options.

    The only thing I have to adjust for in consideration of options is stop loss / targets -- I don't want to get whipped out of trades as institutions manipulate stock prices to make money off of their options at even numbers, etc