Can Option Trading Activity Offer Insights On Future Stock Returns When It Comes To IPO Valuation?

Can Option Trading Activity Offer Insights On Future Stock Returns When It Comes to IPO Valuation? by Mary Garrett

Are there important links between the options market and the stock market that financial professionals can benefit from knowing? And can they glean insights about subsequent stock returns from option demand?

Financial professionals and academics have debated these questions, as well as the influence of IPOs on the markets for years. Theoretical papers have argued that the listing of options on a firm’s stock can have important economic effects on its equity.

A recent research paper titled “Options on Initial Public Offers” highlights consistent links between the price of options and stocks immediately following the introduction of IPOs. It also looks at the...