Can options market predict stock market movements?

by jchang23

It can but its tricky.

I will give you one example.

Say company XYZ is due to announce earnings in a few days. Suddenly, you see a significant rise in call (or put) options that expire in a week. The rise does not match a pattern of the short term call or put options of prior quarters leading into the earnings announcement.

You look at the call options that have the rise and you see that its for contracts that are really out of the money and expire soon after the earnings release. You also study the open interest to make sure that you are seeing the numbers of contracts that are still open and not just volume.

You must consider the possibility that someone got some insider information and does not care to be aggressive and buy up a lot of call options that expire in a week that are way out of the money.

Investors assume that a person with insider information will not do it as the SEC / FINRA will come asking questions. The reality is, greed gets people to do things that are irrational.

So should you trade if you see something like this?

Be very careful. Stock manipulators have been using this technique to get uninformed investors to buy stock.

All it takes is about 2000 dollars on a 30 dollar stock to buy enough out of the money options that expire in a week to create the feeling that somebody knows something. This can cause the stock to rise leading into the earnings report, and give the manipulator a chance to get out before the earnings are announced.

If you do trade based on this, do it with money you can afford to lose or do it with stocks that you are ok with the entry point and will hold it long term even if they do not announce positive results.

One thing I do ask you don’t do. Don’t use that information to buy short term options.

A link to a monitoring tool (you can see basics but they charge for more) www.barchart.com/options/unusual-activity

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