Stock Trading and Other Things

How do stock options affect the price level of stocks?

How can a derivative exert this pressure on the underlying asset?

My impression is that supply/demand of options effects the intrinsic price levels of those options in the market wherein they trade... but how can they affect the actual stock?

Thanks in advance!

Public Comments

1. the options markets do not affect the price of stocks really.

Unless you are considering that people watch interest in options to see if people are placing larger bets on calls or puts, and then buying or selling accordingly.

2. First, I am assuming you a talking about exchange traded options instead of executive/employee stock option plans.

Options do not have any impact on the price level of stocks, but option traders do sometimes influence stock prices temporariliy. This is usually most notable in the last hour of trading before options expire, sometimes called the witching hour.

As a simplified example of how this happens, assume an option trader owns 1,000 puts and 1,000 calls, all at a $40 strike price. (Each option is for 100 shares.) If the stock is below $40 at expiration, the trader wants to be long 100,000 shares that he will sell by exercising the put options. If the stock is above $40 at expiration, the trader wants to be short 100,000 shares that he can cover by exercising his call options. Now let's assume that on the Friday before expiration the stock had been selling for a little under $40. The trader would likely have been buying the stock to get his position up to 100,000 shares to sell. Now, assume that with just minutes before trading ends the stock goes up to more than $40. All of a sudden the trader wants to go from being long 100,000 shares to being short 100,000 shares so he becomes a seller. This will have an influence on the price of the stock, driving it down. The influence is temporary, but very real.