Footprints Of Inside Information
In the United States the use of inside information in the securities markets is no more legal than prostitution (strictly illegal in nearly every state), and probably no less prevalent.
There are some countries where insider trading is permitted and there are even academics and legal scholars in the United States who argue that it should be permitted here too, because it makes the price discovery mechanism more efficient.
These considerations aside, the fact is that it exists here despite heavy penalties imposed by the federal government whenever it is discovered. And if someone has information about a company that will have a strong effect on the price of its stock, the place where that information can be exploited with the greatest leverage is the options market.
This is a case where government regulation produces a market inefficiency you can exploit: If you can detect the footprints of the user of such information, you can follow in his or her footsteps. And it is in the options markets that you can look for those footprints.
If the options on a stock experience exceptionally high volume and open interest, something unusual is going on. That something may well be the purchase of puts by a large institution that wants to protect a position, or perhaps a large trader initiating or closing out a spread, or hedging activity of some other kind by a fund that deals in large volume.
Or it could be the purchase of options by someone with knowledge the market does not have. Whether they came by this knowledge through insider contacts or through clever sleuthing, their activity allows you to do some efficient sleuthing yourself.
In addition to the usual underpriced/overpriced lists, I will soon be posting a daily list of those stocks from the Pisani 250 which show unusual volume activity. Consider investigating the stocks on this list for potential takeovers, good and bad earnings reports, or other news that will have a dramatic effect on the stock price.
The lists will show the option series with unusual volume. If the options showing unusually high volume are calls, the suggestion is that the price may soon experience an unusual increase, and you should look for signs of a takeover, an unexpectedly high earnings report, or other good news. If the options are puts, the price may soon experience an unusual decrease, and you should look for signs of vulnerability to negative events.
I also will post a list of stocks from the universe of all option stocks not in the Pisani 250 that display such activity. These candidates have markets that are thinner than those of the Pisani 250 stocks, but the principles remain the same.
This is just the first of a number of new features I intend to add to the options section. I will be expanding the scope of this site regularly, feature by feature. If you have any requests or suggestions, please let us know.