Does the buying and selling of stock options influence the actual price of the security?

Question

Any info would be appreciated.

Answer 1

Indirectly there can be a minor, short-term, impact because market makers hedge option positions with stock positions.

For example, if a stock is selling at $30 per share and I bought 1,000 call options with a strike price of $10 per share from a market maker, the market maker would almost certainly immediately buy 100,000 shares to hedge his short option position.

So, while the answer is technically yes, for practical purposes it is no.

Addendum:

I see the previous answer offered this advice: "Actually, one of the best ways to "get rich quickly," in the stockmarket is to become an options writer. This is because an options writer shorts/sells a time-decaying asset and almost always gets to keep the whole premium."

While it is true that if you sell out of the money options they will usually expire worthless, when you have a loss that loss may be many time greater than your maximum profit possible. For example, on 2/26/07 I wrote May puts on BSX with a srike price of $15.00 for $0.20 per share. Today, if I were to close that position it would cost me $1.40 per share, resulting in a 600% loss. (Because those puts were part of a bearish spread, my gain on the other leg is of the spread is greater than my loss on those puts, but that does not change the fact that those puts have lost a lot more than the maximum profit I could make if they expire worthless.)

Writing unhedged options can make good money, but can lose even more when the market moves against you. Be careful.

Answer 2

NO. It's the security/equity/stock/commodity that determines how much the option sells for, in addition to supply, demand and other market factors. The price of stock options has no effect on the actual price of the security.

Actually, one of the best ways to "get rich quickly," in the stockmarket is to become an options writer. This is because an options writer shorts/sells a time-decaying asset and almost always gets to keep the whole premium.

Answer 3

I would argue that it does affect the actual price of the underlying security because of how investors react to that information. Stock prices move on information on the economy, a certain stocks sector, and the stock itself. If you were to see a lot of people were buying puts on a certain stock in a much greater quantity than calls would you buy that security long? My feelings would be that if people are buying puts on a certain stock they are also selling that stock. Unfortunatley I have no hard data to back up my answer but I am looking forward to someone who can answer this with cold hard facts.

Answer 4

It's the other way around and it's one way traffic. Options are derivatives. By definition, their value is influenced by the price of the underlying assets. The best analogy I can come up with is the comparison between a big country, such as US, and the small one, such as Indonesia. When stock market in US goes up, chances are the Jakarta Stock Exchange (JSX) will go up as well the next day. If Dow goes down, JSX will most likely goes down as well. But it's a one way traffic. Dow will not be influenced by what happen in JSX. Just like the price of the underlying assets will not be influenced by the price of the derivatives.

Answer 5

The trading only affects the price of the put or call. The strike price is pre-determined. It can affect the volatility or beta.
The only thing that can influence the stock price is the law of supply and demand.