Extracting Useful Information from Listed Option Prices

I often say that attending CBOE’s Risk Management Conferences is the highlight of being employed by CBOE.  Getting a chance to see Stacey Gilbert, the Head of Derivatives Strategy at Susquehanna, speak in person for the first time is a highlight of this year’s European conference.  Her topic, “Extracting Useful Information from Listed Option Prices” is an area I focus on in both my academic and professional lives so I was really looking forward Gilbert’s presentation.

There are three things any trader (option or non-option) can determine from the option market is the estimate of three things –

  • Implied Event Moves
  • Implied Probability Distribution
  • Implied Dividends and Stock Borrow Rates

Gilbert offered a contrast of the difference between information gained from a stock price and the option market.  A stock price represents a real-time fair market value of a stock. The option market may be used to determine a real-time “fair distribution” of the underlying market on future dates.

She then moved on to my favorite topic, earnings.  Using Micron as an example she noted the average historical move and compared it to a current at the money straddle using options expiring the Friday after earnings.

Gilbert also noted how option prices can be used to estimate the market’s expectation of future dividends.  She noted using at the money combos to extrapolate future dividends and that the option market will often adjust in anticipation of a change in dividends.  She also discussed using the combo to determine the cost of borrowing a stock that is hard to borrow or what that cost should be.