Using Options to Predict Prices: A Machine-Learning Approach

Financial markets are in theory efficient. In other words, new information is incorporated into asset prices almost instantly, so their next move should essentially be random. That makes predicting markets difficult. But there may be some anomalies. A well-known one is that stocks with cheap valuations tend to perform better over the long run. A more complex case comes from options markets: The derivatives that grant the right to buy or sell shares can offer information about traders’ expectations. The challenge is teasing out the signal from noise.

Featured in the February/March issue of Bloomberg Markets. Photograph: Ian Allen for Bloomberg Markets

Photographer: Ian Allen

When companies report earnings, the announcements often lead to big moves ...