Many stock traders are choosing to make stock picks from the information obtained from option trading. They feel that this information can provide them an additional amount of information when compared to fundamental and technical analysis. For instance the amount of open call positions for any stock will indicate how bullish investors are for that stock. In an article published in the National Bureau of Economic Research, the analysts Pan and Poteshman wrote about their studies of options. They reviewed ten years of CBOE data and determined that if an investor did nothing more than buy stocks with low put/call ratios and sold stocks with high put/call ratios, that investor would net a return of one percent a week.

Implied volatility can also be determined from the option pricing for the underlying asset up to the expiration date. In reviewing the pricing for a stock, the analyst can determine what the market is thinking will happen to that stock. The option market will price in expected movements in the stock. This can be determined by what the market is willing to pay for that option. Watching the option pricing over time will indicate to the savvy investor what the market is thinking will happen to that stock.

Watching the volume of calls or puts can also send a message to the investors. By comparing the average daily traded volume with the numbers of options being placed, you can see where the option traders are setting their stalls. Lots of calls would be bullish while lots of puts would be bearish. You will need to filter out unusual activity which may be occasioned from news, earnings and government announcements. When you see no apparent reason for the increase in volume then you should begin to wonder. It is possible that someone knows something.

When reviewing the stock options, you should be careful before jumping to a conclusion. You should look over the entire cross section of a stocks strike prices and expires. A large increase in calls may be due to a spread trade, a rollover or other multi-legged strategies. Review your ideas over time before taking action. Determine that an action may be warranted and then watch to see if you were right. Track your decisions and the results on a spreadsheet. Learn from your correct and incorrect guesses. You have the time to create an worthwhile investment strategy. After you have tweaked your style, then you are ready to act on your stock picking tips.

Tags: investment strategy, put/call ratios, stock picking tips, Stock picks from option trading