While many investors are likely familiar with options, their impact on the stock market is much less understood. When an investor buys an option, it can kick off a series of flows into and out of the underlying stock or index that can have significant impact on the price of the instrument itself over time. And with options activity up dramatically in recent years, these flows have become much more important for investors to understand.
This week we take a deep dive into options and their impact on the stock market with Jason DeLorenzo of Ad Deum funds. We look at the major factors that impact the price of options and how those factors lead to option dealer flows that drive stock prices. We also discuss his “Overvixing” model that uses the relationship between the return of the S&P 500 and the VIX index to predict future market performance.