For investors with advanced information, the options market can be a favorable alternative to the stock market. This from an academic research paper from Bucknell, Rutgers, and Yeshiva Universities, and discussed in an article in Chief Investment Officer. The paper examines both stock and option market reactions to U.S. Supreme Court cases that involve publicly traded companies, in an attempt to determine whether Supreme Court decisions can be anticipated based on those reactions.
Using a dataset of more than 500 cases over the last 75 years, the researchers found that the stock market reacts both when the Court requests to review a lower court’s ruling (known as a writ of certiorari) and on the final decision of a case. They noted evidence that the option market could anticipate the final decision as early as when a writ of certiorari is granted, lending credence to the idea that smart money flows into the option market earlier rather than later.
If a publicly traded company is the petitioner in the case where a writ of certiorari is granted, a major change in the implied volatility of the calls took place, signaling demand for calls predicting future events. And a major positive change in the implied volatility of puts for the respondent in the case, anticipating a negative outcome for the respondent, signified higher demand for puts. This led the researchers to conclude that the option market was better able to forecast the Supreme Court’s final decisions than the stock market.
However, the paper also notes that there tends to be a negative reaction in the stock market for any company in a case where a writ of certiorari is granted, whether or not they are the petitioner or the respondent. That’s likely due to the fact that the stock market knows litigation is expensive, no matter what side the company is on.