Why is it important  that the Facebook FB options begin trading today?

Options are bets on price movement.  They represent a sophisticated sentiment survey on the opinion of the future direction of a stock.

For example, there are 2 sentiment survey’s that are popular for investors to follow.  One being the Investor’s Intelligence bull bear survey.  And the other being conducted by the Americal Association of individual investors.  The former is a group of newsletter writers (like me) and the other is a group of individual investors (members of the AAII).

Both of these move similarly, but at different rates.  The AAII is more of a short term volatile indicator, whereas the II survey is slower.  Each has their advantages and disadvantages from us computer trading folks.

But the best survey on the market is from options activity.  Options activity is so powerful in the market, i can create floors and ceilings in price, and pinning of price action ahead of options expiration.

Generally on a stock there are more call options than put options, because people like to sell call options to generate revenue for their holdings.  But these signals, and the correponding implied volatility, can be very telling when it reaches an extreme.  Extremes in either direction can and often signal a reverse.

Point is, if people load up on Put Options on FB to protect their position, this can result in a large upward price move – as the crowd (no matter how sophisticated) gets it wrong more often that right…

The market moves on liquidity and sentiment there are many measures of this.  If you’re interested in learning more, click here to sign up and access all our wealth research.


Stock Barometer

Investment Research Group, Inc.