Using option prices to trade the underlying asset

J. H. Venter, P. J. de Jongh and Eduard Pieterse

Journal of Investment Strategies

Abstract: Option trading provides rich sets of data that may be used to trade their underlying assets effectively. Strategies for this purpose are discussed in this paper. These strategies use the call and put prices of option chains to estimate the consensus features of the future probability distribution of the price of the underlying asset. This enables a trader to predict the expected profit and expected loss that may be experienced when trading in the asset. The expected profit and expected loss are metrics of reward and risk for such trades. Trading rules based on these metrics are shown to be effective when applied dynamically to historical data of the option chains underlain by the Standard & Poor’s 500, Dow Jones and Nasdaq indexes.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ6:7960527

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