Options Trading Analysis and Surveillance: The perfect match [infographic]

30 March 2017

By Adam Frederick

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Over the past few years I’ve attended a few industry panels that have all centered on options trading analysis and its effects on IR. This topic was seldom discussed in IR circles just a few years ago, but it’s relevant today as surveillance can provide much more visibility into options.

For many years, stock surveillance could stand alone as a way to monitor the movement of a company. But now, with more advanced investment choices at investors’ disposal, the historical approach to stock surveillance alone is now incomplete. Today, 14 million options trade every day, which equates to the right to buy or sell 1.4 billion shares of stock on a daily basis.  

Whether utilized by activist investors looking to covertly establish long positions in a target company or implemented as a simple downside protection hedge by an index fund, options volume and popularity has clearly exploded over the past decade.

Here’s an overview of how options is vital to the value of surveillance.

 

Infographic (1)

 

Here are some additional ways to use options to gain a more complete sense of the market.

 

Short pressure on a stock

So let’s say that, for some stocks with extreme short pressure, investors are willing to pay $.XX a share to be able to short a stock for the next XX number of days. This may be demonstrated for as small a period of time as a few days to a longer period such as a year.  Monitoring the variances in these values provides an almost immediate picture of how extreme the short pressure is on a stock. Many IR teams may be surprised at how radically this measure can illustrate the modification of sentiment within a shareholder base.

Sentiment

Through options, IR teams are able to gauge what the investment community is saying about the future of their company. Rather than simply analyzing what has traded, option pricing also shows what the street is saying about the future of an organization, providing a glimpse that is vital to strategic planning and messaging.

Relative option pricing

Relative option pricing is an interesting way to assess what is occurring behind the pricing of a stock.  By tracking not only the derivatives of a single organization, but also their main competitors, sector as whole, and the market as an entity, it can be shown how much of a stock’s movement is related to each area.

 

Options analysis is only useful with the the proper expertise in uncovering options’ true influence on the common stock. To turn information into intelligence, IR and finance professionals need to take the next step: apply analytics to glean the underlying options trading information. Leveraging technological acumen and subject matter expertise allows us to unearth the true meaning behind the equity and options markets.

 

Adam Frederick is the senior vice president of intelligence at Q4 Inc and blogs regularly about surveillance and its applications for IROs.

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