by Larry Swing - October 9, 2005

Education

A recent study published in Derivatives Use, Trading & Regulation inspected the value of option interest in predicting future stock price movements.  The authors used data from early 1999, and found reasonably high predictive accuracy with a relatively simple model.

The model:

Calculate the open interest weighted average strike price of options.  If it is higher than the current stock price, it is a bullish signal; if it is lower than the current stock price, it is a bearish signal.

Using the model to trade a group of high liquidity stocks resulted in superior performance to a buy-and-hold approach.

Another model was proposed in the study that was based on trading both the underlying stock and options; it also performed well.

Reference:

Bhuyan, Rafiqul; Chaudhury, Mo "Trading on the information content of open interest: Evidence from the US equity options market," Volume 11, No. 1, June 2005, pages 16-36.

Analyses of ETFs

BBH:  Neutral.  (Biotechnology)

BDH:  Neutral.  (Broadband)

BHH:  Neutral.  (Business to Business)

EKH:  Neutral.  (European Stocks)

HHH:  Neutral.  (Internet)

IAH:  Neutral.  (Internet Architecture)

IIH:   Neutral.  (Internet Infrastructure)

OIH:  Neutral.  (Oil Services)

PPH:  Neutral.  (Pharmaceuticals)

RKH:  Neutral.  (Regional Banks)

RTH:  Bearish.  (Retail)

SwingTracker
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SMH:  Neutral.  (Semiconductors)

SWH:  Neutral.  (Software)

TTH:  Neutral.  (Telecommunications)

UTH:  Neutral.  (Utilities)

WMH:  Neutral.  (Wireless)