Been trying to make use of stock options to predict forward stock price besides the infamous calls/puts ratio of my own.
So far in terms of downside risks, I have derived this graph from the Friday closing price of BABA (ADR) and their put options to protect against downside risk in the forward periods by deriving the cost of protection proxied by the call outs in terms of expiry dates, strike price ( averaged ) and the internal rate of return. For example.
For expiry 26 Aug 2022, the averaged cost is US$86.91 and the internal rate of return is 0.3897% whereas furthest out for 21 Jun 2024, it can bottom out to US68.30 and 0.0278%.
Will these prices be reflective of the forward downside price of the stock?
BABA.png)
lkypeter@gmail.com Safe Harbor. Please note that information contained in these pages are of a personal nature and does not necessarily reflect that of any companies, organizations or individuals. In addition, some of these opinions are of a forward looking nature. Lastly the facts and opinions contained in these pages might not have been verified for correctness, so please use with caution. Happy Reading. Peter Lye (c) Peter Lye 2019
