I have often seen and read claims that relatively high trading volumes in options are good predictors of future stock prices.

Over the years, I have grown increasingly curious about these claims because I rarely see reports on where and how these analyses go wrong, only when these claims work.

Learn How To Profit From Unusual And Abnormally High Options Trading Volume | Option Alpha

Moreover, most large stock moves do not seem to be preceded by a surge in options volume at all. So what do Speculators know from high options volume?

I recently ran a small test to determine whether I could find any predictive value in options trading volume. Consider this a sample analysis on the effectiveness of systematizing trades triggered by high options volume. My analysis of options expiring February 20, produced two main observations:.

In other words, in this analysis, the overall downward trend in the market served as a sufficient trading signal for bearish trades.

Over a wide selection of stocks, options trading volume provided little additional information for triggering trades. There is little unique information in the options volume itself that informs the trader whether to place a bullish or a bearish bet beyond the market's prevailing trend. I was quite surprised by the consistency of these results. They imply that any advantage gained from watching options volume comes from augmenting the trading rules with other sources of information.

Similarly, the success of the trade is not dependent on the market expressing a bullish or bearish bias in the options trading until expiration. Before I present the quantitative results, here is a summary of the context and assumptions:. The most difficult aspect of building trading triggers from options volume is discerning the significance of any given options trading event.

Options traders buy and sell options for many different reasons. Calls and puts can be used in either bullish or bearish bets. They can also be combined with stock holdings as hedges.

For example, a call may be a hedge on a short stock position, and a put may be a hedge for a long stock position. An investor or trader may also SELL an option for generating premium before committing capital to buy a long stock position. Shorted calls may hedge existing long positions covered calls. Call and put spreads involve buying and selling options.

Strangles and straddles involve taking long positions in both calls and puts. This is enough to conclude that options volume is meaningless before even examining the numbers! However, some people claim they can differentiate amongst all these alternative motivationsso my curiosity got the best of me on this one. Again, it is very likely that traders must use additional knowledge sources to impart meaning to signals from the options volume.

I describe the results of this analysis using a series of histograms.

Each histogram is structurally the same. The x-axis represents the range of price change in the underlying stock from the time of the high options volume to either A the point of the lowest stock price on or before options expiration on February 20,B the point of the highest stock price on or before options expiration, or C the day of expiration.

The title of each chart click on each to enlarge explains which of these scenarios is relevant. The price range is inclusive of the top of the range and exclusive of the forex withdraw to paypal of the range.

The y-axis represents the number of times frequency that an underlying stock achieved the price change on the corresponding x-axis.

I do not attempt to distinguish whether the maximum return precedes the minimum return or vice what are traders relying on a rising currency rate called. Each high-volume options event is recorded with an "action date", the underlying stock, and various price points for the stock: I also record the high trading volume of a different option strike or same option on a different day on the same underlying stock as a separate options trading event.

This eliminates the need to determine why a particular option is traded. It also means that a stock that experiences broad-based options activity across multiple strikes and multiple days what does high call option volume mean count multiple times in this analysis. Fortunately, after eliminating options on the major indices, no single stock or sector-specific ETF dominated this analysis.

Finally, I separated the underlying stocks into three categories based on the kinds of options trading on them: These distinctions allowed me to determine whether the type of options being traded had how much money does bartender make in texas significant predictive value on the resulting price change in the stock.

Simplistically, we would want call buying to clearly signify a buying opportunity in what does high call option volume mean stock and put buying to clearly signify a shorting opportunity. It also means that each category contains a mutually exclusive set of stocks. For all three price change scenarios - the maximum change, the minimum change, and the change to expiration - the distribution of price changes is nearly the same. You can confirm this by converting the histograms' y-axis to percentage of observations.

Note also that these data suggest it is typically not desirable to hold the options to expiration. When the underlying stock moves "significantly" in favor of the trade, it is best to take the profits.

At last, here are the results in graphical form Price change from the day of high-volume options activity to the day of maximum stock price before option expiration.

The distribution of price changes is nearly identical to the call buying above. Again, the distribution is nearly identical the two histograms above. Price change from day of high-volume options activity to minimum stock price before option expiration. Since this percentage is the same as the call-buying scenario, we conclude that the general downtrend in the market dominates these results.

Once again, all three histograms for this scenario are very similar. Price change from day of high-volume options activity to option expiration. Again, we conclude that the general downtrend in the market dominates results. I am still collecting options trading data.

Does Heavy Call Option Volume Indicate Good Earnings? | ucujaluxu.web.fc2.com

I hope to provide updates on this analysis in the future and determine whether the results change under different contexts in the market. Note well that these analyses are a bit tedious, so I cannot give any guarantees!

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For other disclaimers click here. Can High Options Volume Predict Future Stock Prices? My analysis of options expiring February 20, produced two main observations: The overall downward trend in the market dominates stocks' price performance regardless of the options trading.

For example, stocks perform nearly the same mostly negative between the date of the high options volume and options expiration whether the high options trading volume is only in calls or only in puts.

Also, the maximum price gain in a stock improves slightly if just puts are traded in high-volume instead of just calls. When both puts and calls are traded in high-volume on the same underlying stock, the stock's price performance is at least equal to the cases where only calls or only puts are traded in high-volume. Investing IdeasLong IdeasShort IdeasMacro ViewMarket OutlookOptions. Want to share your opinion on this article? Disagree with this article? To report a factual error in this article, click here.

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