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Strategies & Market Trends : Stock Attack -- A Complete Analysis
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To: Chris who wrote (5761)2/4/1998 7:24:00 PM
From: Robert Graham   of 42787
 
Option activity can be a part of the analysis of the underlying stock itself as you are aware. For example, if there is a sudden surge in implied volatility, this can indicate an upcoming move in the underlying stock. One reason this that options are can be used as a hedge by big money that is preparing to move into the underlying stock. When they purchase large blocks of stock, this can have a temporary effect of increasing the price of the stock where there purchases can work against them in this way. This rise in price will be reflected in the CALL options they purchased. Selling of the CALL option as they are accumulating stock should to some extent offset the increase in their cost basis that they encounter as the result of the rises in the price of the stock.

Another reason is that options are a comparatively inexpensive and very popular way used to make a leveraged play on upcoming news. So if some insider tells his buddy at the country club that the company is going to report an earnings surprise, this friend of his can purchase the options on the stock. So option activity can be a visible effect of a news leak. By the way, this is how insider information is profited from. The executive tell his buddies who can be executives at their respective companies the news so they can benefit from each other's inside information. In this way there is not a direct connection between the profits that are made this way and the insider news that was illegally profited from.

Any comments or feedback?

Bob Graham
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