Wow, we haven’t done one of these for a while. And what are these, you may ask? A weird little property of options pricing, actually – you can back out predicted prices of a stock on a particular day by simply looking at options prices. The ‘most likely’ price, at least dictated by the market, should be priced in a particular way.
In theory, all of that sounds great – but in practice? It’s a little different. So, here’s what we’re going to do – we’re going to reveal what options are implying for future S&P 500 closing prices today. Then, later this week, we’re going to review all of the predictions our model made last year.
Predicting the S&P 500
When we make these predictions, we are targeting a 75% rate – as in 75% of the time the S&P should close between the bounds (12.5% of the time it should end above and 12.5% below). We consider a contract to be significant (i.e. not noise), if it trades at least .5% of daily volume for that closing date. We also screen based on open interest – it must be above .02% of total open interest for us to count it. We use contracts on the ETF SPY, an exchange traded fund which tracks the S&P 500. We retrieved them today – things may change tomorrow.
That said, here’s what the options market implies from here through 2015 (and yes, calls have a hitch in December 2014 – go exploit that, haha):
Table Format, for Easy Digestion
Don’t like the chart? We’re here to bail you out – here’s the data dumped into a table so you can either adjust your own expectations, or bet against the odds being presented (more on that Wednesday).
So, what are you predicting for the year? Direction, magnitude? Anything you want to know about the model?