V. 7:12 (460-461): Option premiums by Arthur Merrill

V. 7:12 (460-461): Option premiums by Arthur Merrill
Item# \V07\C12\OPPREM.PDF
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Option premiums by Arthur Merrill

Can we derive useful information about the future direction of the stock market from option statistics? I've found one item of data that has a good prediction record—the ratio of the premium on puts to the premium on calls. (Premium is the strike price plus the cost of the option minus the current price of the underlying security.)

The basic data, weekly average put and call premiums, are calculated and published by the Options Clearing Corporation, 440 LaSalle, Chicago, IL 60605, and the weekly ratio is published by Technical Trends, P.O. Box 792, Wilton, CT 06897.

You can give the ratio in Figure 1 an eyeball test for success in comparison to the Dow Jones Industrial Average in Figure 2. However, I ran specific tests over a 12-year period and not only were the short-term forecasts better than average in calling the market higher or lower, but the indicator put in a stellar performance in calling the direction one year later.

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