The Price Is RightOne of the first steps in using options as a predictive indicator is to appreciate the level of sophistication and knowledge of professional traders and market makers. The most obvious and easily measured data point to illustrate this is price, reflected specifically in the implied volatility applied to a given option. "If implied volatility is high, there is usually a good reason," says Tom Hough, a market strategist with PTI Securities. (For a list of options definitions, please check out my glossary for the Options Alerts newsletter.)
That's near a 52-week high, and well above the stock's historical volatility of 36% over the past 60 days. Keeping premiums pumped is the anticipation of an FDA ruling on its migraine drug, scheduled for Aug. 4. Because the immediate future of the company rests on the outcome of this decision, it's no surprise the options are pricing in a move of nearly 24%, or $2.10, over the next three weeks.