How Does Options Trading Affect Stock Prices?

If you are doing trading with options, you are also watching stock prices. Maybe you have noticed that options prices change as you trade stocks or that stock prices change as you exercise your options. Is this a mere coincidence, or is there a relation between the two prices, and how do options trading affect stock prices?

Options trading can affect stock prices, but usually only in a pinning process, and occasionally if many options are being executed simultaneously. Typically, stock prices affect the options prices, and the price will go up or down depending on the type of option, but not at a direct rate.

So how exactly do stock prices affect options prices, and when do options prices affect stock prices? This article will explain how these two affect one another. It also provides suggestions of additional reading material available to learn more about options, stock price volatility, and everything else you need to know about how options trading affects stock prices. 

IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!

Understanding the Options Delta

The following definition is from Investopedia regarding the Options Delta, which will help us to explain how options trading and stock prices are correlated:

“Delta is the ratio that compares the change in the price of an asset, usually marketable securities, to the corresponding change in the price of its derivative.”

Now, we will need to break down the definition of the options delta. In this definition, the asset is the stock, and the derivative is the option. So the delta measures the change in the option price depending on the change in stock price. 

The delta can range from a negative one to a positive one depending on the type of option. Call options – options that let you buy the stock at a specific price – will have a delta that ranges from zero to one since the price of call options will increase as stock prices rise. For put options, options that allow you to sell stock at a specific price, the delta will range from a negative one to zero. For put options, the value will decrease as stock prices increase.

The change in options prices relative to the stock price is not a direct correlation. However, options do show an increase or decrease in the price depending on the sign of the delta, meaning that a positive delta means a price increase, and a negative delta means a price decrease.

So, options change based on the stock prices, which the delta illustrates, and this ranges from a negative one to a positive one. But does it work the other way around? Do options affect stock prices?

When Do Options Affect the Stock Prices?

Options do not have a significant impact on stock prices. In fact, options do not directly change stock prices at all. However, they can affect how stock prices move in a process known as pinning. 

Pinning is when the stock price nears the strike price of popular options as the expiration date of the options approaches. The term comes from the idea that the stock price stays “pinned” to the strike price until expiration.

So why does pinning occur? Pinning occurs when a lot of similar options are outstanding and about to expire. The outstanding options include both put and call options. In such as situation, the price will pin when there is a lot of trading occurring as the expiration date is approaching since people are trading with their options in mind.

When options are approaching their expiration date, many people will likely be exercising their options. When options are exercised, traders will buy or sell their stock based on the option they have. All of this activity from people exercising their options can cause the stock prices to pin but not necessarily change based on the options.

Does a Lot of Options Trading Affect Stock Prices?

In addition to pinning, some people say that on rare occasions when a lot of options trading and exercising is occurring, stock prices will get affected. While this may be true, it is not consistent enough to prove that options trading affects stock prices, especially since many other factors can cause a massive increase in trading.

Sometimes, you will notice a change in stock prices as you buy or sell your options. The difference could be from exercising your options, especially if many people are exercising their options simultaneously. However, this does not always happen, and there are an infinite amount of other factors that could affect stock prices. 

Therefore, this could be because many options are traded, or it could just be a coincidence, and the change in stock prices is due to several other factors. Some factors that affect stock prices include a high demand compared to supply, meaning many people want to buy the stock, but there is not much stock sold. The increased demand for stock can be due to options trading or not.

For instance, if a company is making significant changes or has a big announcement coming, their stock price can increase or decrease depending on the changes and speculation people make regarding the event. Additionally, a price decrease may lead to many people selling to maximize their losses, or many people selling in the hopes that prices will increase in the future and they can profit from a temporary price decrease.

If you want a short, simple explanation of how options trading can affect stock prices, watch this video from Option Alpha on YouTube:

Good Reads To Learn More About Options Trading

The best way to learn more about how options trading can affect stock prices is to educate yourself on how options work and what factors can affect stock prices. The books below are a great place to start if you want to learn more about options trading. All the books are available on Amazon:

• The Option Trader Handbook by George Jabbour: This book will teach you how to understand options trading at a more advanced level. As markets change, you will need to understand the changes, including how and when they happen. This book will teach you how to understand those changes including how stock prices change relative to options.
• Every Woman Should Know Her Options by Laurie Itkin: This book is all about teaching women how to be empowered by managing their stock portfolios. A play on words in the title, women will learn about options, stocks, how stock prices change, and read some powerful stories from women who have been successful in the stock market. And, yes! this book is equally beneficial even to male readers.
• Options Trading 2021 by J. James Ernings: The guide includes three books teaching beginners how to invest their money in the stock market, how to day trade, and how options can maximize your portfolio. You will learn how to take your extra money and use it to profit in the stock market.

Author’s Recommendations: Top Trading and Investment Resources To Consider

Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.

• Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.

• Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!

• Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)

• Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)

Conclusion

Options prices are affected by stock prices, and this is measured by delta. As stock prices rise, call options will increase in value, while put options decrease. The change in call and put option prices also works the other way around when stock prices decline. 

As for options trading affecting stock prices, pinning occurs if many options are outstanding and the expiration date is approaching. Otherwise, options prices likely don’t affect stock prices, and if it seems like they are, it’s probably a coincidence, and other factors are changing the stock price, such as a high amount of trading of the stocks.

BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!

Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.