Predicting stock prices using options data

Abstract

The parameters of the Black Scholes model, such as the time to maturity, the strike, the risk-free interest rate, and the current underlying price, are unequivocally observable. However, if the Black–Scholes model held, then the implied volatility for a particular stock would be the same for all strikes and maturities. In practice, the implied volatility surface is not flat or in other words, implied volatility is an empirical function of strike (moneyness or delta) and maturity. Therefore, we can say that with every combination of moneyness and maturity, the market gives us new information in the form of the option price. Therefore, options data is multi-dimensional, which makes it difficult to study.