If you wish for evidence of options driving stock prices examine the data in Stocks for the Long Run when the options markets were shutdown due to flooding in Chicago. Quite remarkable.
FRANKY:
You're right about Hedgestreet. However, I'm not sure that there's nearly enough trade volume in the Hedgestreet contracts to make them an appropriate hedging tool except for very small investors (good size trades would move the prices of the contracts too much). I think the mere fact that the new indexes and derivatives are coming out under the S&P aegis will make them get a lot more trading volume.
LORD:
I'm not aware of any evidence that option prices "drive stock prices". I do know that there's some evidence (can't remember the study since it's not my area, but I'll find it if anyone wants) that informed traders prefer the options markets. This is for two reasons:
1) They can more easily hide their trades among mulitple contracts
2) They get greater leverage (derivatives move more than their underlying contract)
However, that's not exactly the same thing as "driving" stock prices. If you know of any studies showing that, please let me know - I'd love to read them.
THC: I vacillate between the two terms. I used "contingent claims" since it was in the article. But you're right. The term seems to have become incresingly popular relative to the term "derivative" in recent times.
I love the phrase "contingent claims". I guess we're not using the word "derivatives" anymore.
But will they be large enough to drive home prices the way options drive stock prices? It would take quite a bit to do that.
I thought that there was a way already? Hedgestreet.com was one way and for large financial institutions they could always get some sort of customized derivative from the Street (although they'd have to pay for it). Just a thought
Commenting by HaloScan
