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I recently went through a serious of lectures on economics and markets, and I was surprised by the lectures on options. The lecturer, said that the future prices of certain commodities like rice (food) could be closely estimated with option prices of the present. Commodities like fuel are also closely linked, but there are problems when there is war and diplomatic issues. But for things like shares, options prices are irrelevant to the prices of the future.

While I understand the second example, I was to surprised with the other two because no reason was given. If anything, shares are controlled by the society, and therefore, should have been easier to control compared to say food, which is susceptible to natural calamities.

So my question is what are the characteristics of markets that could be predicted with options prices of the present?

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  • $\begingroup$ This question needs some clarifications. The summary of the lecturer’s views appears to be implausible. I think there are some missing key details. Furthermore, it is unclear what “closely estimated” means, and why option prices are used, rather than futures/forward prices. The central expectation of options prices will coincide with the forward price in any market. The only reason to use options rather than forwards is to try to estimate the error band around the central estimate. $\endgroup$ – Brian Romanchuk Jun 28 '18 at 22:11
  • $\begingroup$ @BrianRomanchuk Well the lecturer provided a formula that could be used to estimate (not know) to a close degree, the future cost of some products in the original market by the current prices in the options market. This is assuming that we only use our option in the expiry date. That lecturer did also have a formula for the forwards market. $\endgroup$ – Kavi Vaidya Jun 30 '18 at 6:57
  • $\begingroup$ It would help a lot if you could add the formula. Since the expected value in the options market equals the forward price (as a result of arbitrage), the only thing options add is a measure of the dispersion around the expectation. $\endgroup$ – Brian Romanchuk Jun 30 '18 at 13:10
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what are the characteristics of markets that could be predicted with options prices of the present?

There aren't any. Options might be descriptive of the present, today's expectations, and of today's uncertainty; but they cannot be predictive of the future.

Putting aside the intrinsic value of in-the-money options, option prices reflect traders' expectations about the future price of the underlying asset. But expectation does not mean determination or prediction of the future. In fact, traders try to factor volatility in their valuation of options, which further weakens the notion that option prices are predictors. Volatility represents uncertainty.

Therefore, it is false that option prices predict what the future price of the underlying asset will be.

The lecturer is wrong in the distinctions he stated. Had he substantiated his rationale for the distinctions, we would be able to either follow his point or identify where exactly his argument goes astray.

What could happen is that an option or its underlying asset are under- or overvalued, thereby creating arbitrage opportunities while price adjustments take place. However, that has nothing to do with options prices predicting any future prices.

While I understand the second example, I was to surprised with the other two because no reason was given. If anything, shares are controlled by the society, and therefore, should have been easier to control compared to say food, which is susceptible to natural calamities.

Whether an asset is controlled by either nature or society has no bearing on this matter because nature and society are not even disjoint factors, and they are not mutually exclusive factors.

Trade and production of rice are subject not only to nature calamities, but also to acts of man: strikes, increase of technology, changes in work culture, sudden news that rice cures a chronic disease, and so forth.

Conversely, the stock price of an oil company might go down as a result of nature calamities and thus be unrelated to the acts of man.

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  • $\begingroup$ @user253751 In statistics, econometrics, etc., the notion of accuracy of a predictor is kind-of implied when speaking of a predictor because that is sought when studying predictors. In my 2nd paragraph I tried to explain the distinction between expectation and prediction: Volatility (1) escapes the concept of expectation, and (2) tends to weaken the reliability of a predictor. $\endgroup$ – Iñaki Viggers Dec 19 '19 at 14:04

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