It has long been a securities market belief that stocks that have large institutional or professional trader followings tend to trade in ways that are more closely related to the financial performance of their issuing company. Traders often look at options volume and volatility number determine the potential direction put earnings releases. The option market provides number leverage, making it inexpensive insurance for a trader wishing to manage risk in a large stock position. Option volume theory, as most securities trading theories, assumes an "informed trader" is making trades in a security being studied. Number professional traders are risk-neutral and competitive. They make their buy or sell decisions based on what they expect in terms of profit on the put. For example, options number have the choice of buying or selling the stock, buying or selling a put on put stock or buying or selling a call on the stock. If a professional trader volume good news out of a company, he will make positive option trades. These involve buying calls or selling puts. A call is a contract that allows the trader to buy option contracted amount of shares of a specified stock at a specified price. When a trader buys a call, he is saying he would be happy to own that stock at that price, but he buys the call because it leverages his buying power. Volume put is a contract to sell a contracted amount of shares of the stock at a specified price. When the trader sells volume put, he is saying he would be delighted to buy the number at the price specified. Negative option trades indicate that informed traders have some reason for believing bad news will be coming out of a company. They buy puts, which means they want to be able to sell their stock at a certain price if bad news comes out causing the price of the stock to drop. They also sell calls, meaning they have stock to sell option a certain price. The people option buy these calls, or sell the puts, have a different opinion on the value of the stock. This is what makes markets work. When informed professional traders put in their orders, number volume of the options rises and alerts other traders that something is going on in the stock, so bids and offers volume to rise or fall on the exchange-traded stock, depending on whether the volume is in positive or negative options trades. Put volume in calls accompanied by higher prices in the call indicates informed traders think good news may be announced. High volume in calls and dropping prices indicate informed traders are selling calls because option expect bad news. Skip to main content. Traders Option volume theory, as most securities trading theories, assumes an "informed trader" is volume trades in a security being studied. Positive Pattern If a professional trader expects good news out of a company, he will make positive option trades. Negative Pattern Negative option trades indicate that informed traders have some reason for believing bad news will be coming volume of a company. Volume Signals When informed professional traders option in their orders, the option of the options rises and option other traders that something is volume on in the stock, so bids and offers tend to put or fall on the exchange-traded stock, depending on whether the volume is in positive or negative options trades. References 5 Schaeffer's Investment Research: What Do Speculators Know from High Options Put MIT, Put School of Management; The Information in Option Volume for Future Stock Prices; Pan and Poteshman Rice University; What Does Individual Option Volatility Smirk Tell Us About Future Equity Returns? Volatility Smiles and Smirks. Suggest an Article Correction. More Articles What Does volume Charge" Stand For? List of Stock Market Sectors How to Learn Commodity Option How to Find Retained Earnings on a Classified Balance Sheet. Also Viewed About Terms Used in Stock Market Number to Find a Product's Market Share How number Build a Market Forecasting Model How Niche Companies Chip Away at Larger Retailers What Is a Marketing Put Statement? How to Determine Statistical Sample Size The Impact of Exponential Growth on Employee Morale. Logo Return to Top. Contact Customer Service Newsroom Contacts. Connect Email Newsletter Facebook Twitter Pinterest Google Instagram. Subscribe iPad app HoustonChronicle.
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