Historical options data can be used to generate trading ideas even if you are not trading options, here’s ten ways to creatively use options data for trades :
(there are numerous sources for options data such as CBOE or FirstRate Data)
- Identifying Long-Term Trends :
Option prices can give much stronger signals than stock data about future price trends. Consistent high open interest in out-of-the-money options is a good indicator of price direction. A good example of this is Tesla (TSLA) in 2019/20 when there was very high open interest in out-of-the-money long-dated call options which presaged a 700%, multi-year stock rally. - Study options volume and open interest:
Unusual spikes in volume or open interest can signal institutional activity or emerging trends. Watch for short-dated out-of-the-money call buying (typically at least 20% out-of-the-money) to indicate a significant upcoming event such as a merger or acquisition. - Analyze volatility patterns:
Recurring patterns in implied volatility around certain events or time periods. For example, you may notice that implied volatility tends to spike before earnings announcements for a particular stock. This could present opportunities for volatility-based strategies like straddles or strangles. - Identify mispricing:
Compare historical implied volatility levels to realized volatility. If there’s a consistent discrepancy, it may indicate potential mispricing that could be exploited. For instance, if options are consistently overpriced relative to realized volatility, selling strategies may be profitable. - Examine seasonal trends:
Some stocks or sectors exhibit seasonal patterns in options pricing or volume. Identifying these patterns could help time entries and exits for trades. - Backtest strategies:
Use historical data to backtest various options strategies across different market conditions. This can help identify which strategies tend to perform best under specific circumstances. - Analyze put-call ratios:
Extreme readings in put-call ratios often precede market reversals. Studying how these ratios have behaved historically can help identify potential turning points. - Examine options skew:
Changes in the volatility skew over time can indicate shifts in market sentiment or risk perception. This information can be valuable for timing directional bets or volatility trades. - Look for recurring price patterns:
Identify stocks that consistently make larger or smaller moves than what their options imply. This could present opportunities for selling overpriced options or buying underpriced ones. - Study time decay patterns:
Analyze how options prices decay over time for different stocks and market conditions. This can help optimize entry and exit timing for various strategies.