does option trading affect stock price? Explained

This article answers the question “does option trading affect stock price” by summarizing the theoretical channels (informational flow, market‑maker hedging, gamma near expiry, exercise/pinning, li...

2026-01-24 07:51:00

By Alex Carter

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Introduction

Does option trading affect stock price? This article directly answers that question and explains how option market activity can influence underlying stock prices, volatility, and short-term liquidity. Readers will learn the core theoretical channels (information, hedging/delta‑hedging, gamma amplification, exercise/assignment effects, and market‑structure impacts), the main empirical findings, practical signals to watch (put‑call ratio, open interest concentration, implied volatility, delta‑weighted flows), and how these lessons extend to crypto options. As of 2026-01-22, according to academic and market reports including papers in Review of Financial Studies and The Journal of Finance, effects are measurable but vary substantially across securities and market regimes.

This guide is beginner friendly, cites leading academic work and practitioner evidence, and highlights how Bitget tools and data can help traders and analysts monitor options-related market pressure.

Note: This article is educational and informational. It does not provide investment advice.

Overview and key concepts

Before addressing whether and how options trading affects stock prices, it helps to define basic option terms and the market participants involved.

Option basics: a call gives the buyer the right (not the obligation) to buy the underlying at the strike before or at expiration; a put gives the right to sell. Strike and expiration define payoff profiles.
Greeks: delta measures option sensitivity to the underlying price (approximate shares of underlying to hedge per option); gamma measures how delta changes with the underlying; vega measures sensitivity to implied volatility.
Open interest: the number of outstanding option contracts at a given strike. High open interest at particular strikes concentrates potential exercise or hedging needs.
Order flow: the direction and aggressiveness of trades in option markets (e.g., large aggressive buys of calls) which may convey information or create hedging needs.

Key actors:

Retail traders and directional speculators
Institutional investors and hedge funds
Market makers / dealers and liquidity providers
Corporate insiders and program/trading desks

Understanding interactions among these actors is essential: a large option buy might reflect information, could be the work of a hedged position, or might be a pure volatility trade. The path from an option trade to a stock price move often goes through market‑maker behavior or through other market participants inferring information and trading the stock.

Theoretical channels linking option trading to stock prices

Several channels explain how option trading can affect an underlying stock's price. These are not mutually exclusive and may operate differently in normal trading, stressed markets, or near option expiry.

Informational channel

Option trades — especially large and aggressive ones — can convey private information. A trader buying large volumes of calls or puts may have a directional view or private information about expected news. Other market participants may infer that the option buyer expects a future price move and trade the underlying accordingly. The inferred information can move prices even before any hedging takes place.

Example mechanism: an aggressive block purchase of calls at an out‑of‑the‑money strike can suggest bullish private information; liquidity providers and arbitrageurs who see the trade may buy the underlying or modify quotes, incorporating the inferred information into price.

Hedging / delta‑hedging channel (market‑maker hedging)

When a market maker sells options to a buyer, the market maker typically acquires a net delta exposure. To remain market‑neutral, market makers hedge by trading the underlying stock in proportion to the option delta. Large option order imbalances therefore induce offsetting trades in the stock market.

If many call options are bought, dealers who sold those calls may buy the underlying to hedge: buy call → dealer buys underlying → upward pressure on stock price.
Conversely, heavy put buying can lead dealers to short the underlying to hedge, exerting downward pressure.

This channel is mechanical and can transfer option‑market order imbalance into stock order flow. The overall price impact depends on the scale of option flows relative to stock liquidity and on how promptly and aggressively dealers hedge.

Gamma and expiry‑related amplification

Gamma governs how an option’s delta changes as the underlying moves. Near expiration, gamma increases for at‑the‑money options: a small move in the underlying produces large delta changes. Hedgers must rebalance their hedges more often and more aggressively, buying as the stock rises and selling as it falls (for short‑gamma positions), which can amplify short‑term moves.

This dynamic can create feedback loops, especially near expiration when many options are near the money: price moves cause re-hedging that further magnifies price moves.

Exercise and assignment effects at expiration (pinning)

When many option contracts concentrate at specific strikes, the exercise and assignment process at expiration can create buying or selling pressure around those strikes. Traders and hedgers adjust positions to avoid assignment, and exercised options lead to immediate transfers of stock (for American‑style exercise) or influence settlement prices.

Pinning: stocks sometimes trade near heavily‑open interest strikes on expiration day as market participants trade to manage exercise and assignment risk. Pinning is more likely when open interest at a strike is large relative to the stock’s float and liquidity.

Market‑structure and liquidity channels

Introducing options to a stock or a surge in options activity can change the market microstructure of the underlying equity. Option markets attract additional participants, create cross‑market hedging flows, and can alter depth and spreads in the stock market. In some cases, option listing is associated with improved liquidity and price discovery; in others, concentrated option activity increases short‑term volatility and spreads due to dealers’ inventory and hedging constraints.

Empirical evidence

A large academic and practitioner literature studies whether option trading affects stock prices. The evidence is nuanced: many studies find measurable effects through informational and hedging channels, but magnitudes vary across securities, sample periods, and methodology.

As of 2026-01-22, according to multiple academic reports published in outlets such as Review of Financial Studies, Journal of Finance, and specialized working papers, researchers find consistent evidence of both informational and hedging effects — with heterogeneous magnitude driven by option volume versus stock liquidity and by market regime.

Evidence for informational content of options order flow

Several studies document that option order flow predicts future stock returns and contains information not immediately reflected in stock prices. Work by scholars (including studies in Review of Financial Studies and related SSRN papers) finds that aggressive option purchases — when measured using delta‑weighted option order imbalances — forecast abnormal returns in the underlying stock over short horizons. This supports the view that some option trades reflect private information or directional views that are later realized in stock returns.

Interpretation: When option buyers are informed, their trades shift price expectations via either direct trading in the stock by others or through changes in market maker quotes.

Evidence for hedging‑induced price impact and volatility effects

Other research finds that dealer hedging, delta rebalancing, and gamma exposures can increase volatility and the probability of large price moves, especially intraday and near expirations. Papers that analyze intraday data report that delta‑hedging flows can generate notable short‑term price pressure, and that stocks with active options markets exhibit larger price impact from option order imbalances.

These hedging effects are more visible when (a) option flows are large relative to stock liquidity, and (b) dealers are net short options (short‑gamma) and must constantly rebalance.

Expiration‑date effects and pinning

Empirical studies on option expiry document systematic effects around expiration dates. Some stocks exhibit higher probability of trading near popular strikes (pinning) and show abnormal trading patterns and returns on expiration days. The magnitude of expiration effects correlates with strike concentration and open interest relative to stock trading volume.

Evidence indicates that expiration effects are real but not universal: pinning is stronger for smaller, less liquid stocks and when open interest concentrates at a few strikes.

Effects of option listing on market quality

Interestingly, the introduction of options on a stock is often associated with improved liquidity and better price discovery in the underlying security. Some studies in the Journal of Finance find that option listing increases trading activity, reduces bid‑ask spreads, and enhances informational efficiency. The arrival of options attracts more active pricing and arbitrageurs, which can improve long‑run market quality even while short‑term hedging and expiry effects raise near‑term volatility.

Cross‑sectional and magnitude considerations

A consistent theme is heterogeneity across stocks. The largest impacts appear for:

Stocks with high option open interest relative to average daily trading volume in the underlying.
Small‑cap or thinly traded names where unit option contracts represent a large fraction of daily stock liquidity.
Periods of elevated implied volatility or when the market has large short‑gamma exposures.

For large, highly liquid blue‑chip stocks, option‑induced effects on prices tend to be smaller in magnitude but still present, especially intraday or around major macro/news events.

Common metrics and signals derived from options markets

Traders and researchers use several option‑market metrics to quantify pressure and sentiment. These are useful to interpret whether option trading might move underlying prices.

Put‑Call Ratio (PCR)

Put‑call ratios compare the volume or open interest of puts to calls. High PCRs can indicate relative bearish sentiment (or hedging demand), while low PCRs can signal bullish bias. Traders use PCR as a contrarian or confirmatory indicator, but context matters: many strategies create put buying that is hedging rather than bearish speculation.

Open interest and strike concentration

Monitoring open interest by strike reveals concentrations that can predict expiry pressure and pinning risks. Large open interest at a strike near current prices raises the chance of price clustering at expiration and increases the potential for exercise‑related flows.

Implied volatility and VIX‑style measures

Implied volatility (IV) derived from option prices reflects market expectations of future volatility. Rapid changes in IV often accompany or anticipate large stock moves. Aggregate measures like VIX track market‑wide implied volatility and can correlate with cross‑sectional option pressure.

Option‑order‑flow imbalance measures (delta‑weighted flows)

Academic work often uses delta‑weighted option order imbalances (aggregating buy/sell pressure weighted by delta) to quantify how much option activity translates into equivalent stock shares. Delta‑weighted flows provide a more accurate proxy for hedging pressure because they reflect how many underlying shares hedgers must buy or sell per option contract.

Practical tip: monitoring delta‑weighted net buying of calls (or puts) can reveal directional pressure likely to flow into the underlying through hedging.

Practical implications for market participants

Different market participants should interpret the relationship between option trading and stock prices according to their horizon and role.

For traders (timing and risk management)

Short‑term traders should monitor option flows, delta‑weighted imbalances, large block trades, and open interest concentration around strikes. Option‑driven hedging can create intraday momentum or reversals.
Be particularly cautious near expirations and when implied vols spike: gamma‑driven rebalancing can amplify moves.
Use options data as an additional signal, not a standalone predictor. False positives occur when option activity reflects hedging or volatility trading rather than directional conviction.

For long‑term investors

For buy‑and‑hold investors, the effect of option trading on long‑term fundamental value is modest. Most option‑related price pressures are temporary and driven by hedging or expiry mechanics.
Awareness matters: concentrated option activity can create short‑term liquidity shocks that temporarily widen spreads or move prices; plan trade execution accordingly.

For market makers and liquidity providers

Options introduce hedging costs and inventory risk. Market makers must manage delta and gamma exposures and price the cost of inventory and dynamic hedging into option quotes.
During stressed regimes or when dealers are heavily net short options, liquidity provision in both options and stock markets can be impaired, creating larger price moves.

Limitations, open questions, and debate

While empirical evidence supports several channels connecting option trading to stocks, important limitations and open questions remain.

Identification and causality challenges

Separating causality is difficult because option trades and stock trades often occur in response to the same underlying information. Researchers use instrumental variables, natural experiments (e.g., option listing events), and high‑frequency order‑book analysis to isolate causal flows, but residual endogeneity remains a concern. In practice, both channels — information and hedging — can operate simultaneously.

Market evolution and structural changes

Market structure has changed rapidly: electronic trading, algorithmic market makers, ETFs, retail option order flow, and growth in OTC and crypto options all affect magnitudes and mechanisms. These structural evolutions mean that findings from older datasets may not fully generalize to current markets. For example, algorithmic gamma hedging or cross‑margining between equity options and single‑stock ETFs can alter hedging patterns.

Researchers continue to debate how these structural changes change the net effect of options on price discovery and liquidity.

Extensions to cryptocurrency and other asset classes

The same theoretical channels — information, hedging, gamma, expiration mechanics — apply to crypto options, but with important differences:

Liquidity fragmentation: crypto markets are more fragmented; options exchanges and spot venues may have different liquidity profiles, increasing potential cross‑venue impacts.
24/7 trading: continuous trading changes hedging schedules and expiry timing conventions.
Custody and settlement differences: crypto options may use cash‑settlement conventions, and exercise/assignment mechanics differ by platform, affecting pinning risks.

On Bitget, crypto options with high open interest relative to spot liquidity can create localised price pressure similar to equity options; monitoring open interest, implied volatility, and delta‑weighted flows remains useful.

Regulatory and systemic considerations

Concentrated option positions, heavy dealer short‑gamma exposures, and large expiry clusters can pose systemic risks in stressed periods. Regulators and exchanges monitor market integrity and the adequacy of market‑maker capital and risk controls.

Market stability concerns focus on dealer resilience, adequate margining, and transparent exercise/settlement mechanics to avoid forced liquidations and cascades on expiration days.

External data & live monitoring with Bitget

To monitor metrics discussed here on Bitget:

Track open interest by strike and aggregate option volume to spot concentration and potential expiry pressure.
Watch delta‑weighted order flow indicators and implied volatility changes to estimate hedging demand.
Use Bitget Wallet and Bitget’s market data tools to view real‑time option trades and order book depth for both spot and options markets.

Explore Bitget’s options dashboards and data feeds to make these metrics actionable for both spot traders and options participants.

Practical checklist: What to watch when asking “does option trading affect stock price”

Is option open interest concentrated at a few strikes near the current price? (increases pinning risk)
Are delta‑weighted net option flows strongly positive or negative? (implies hedging flows)
Is implied volatility spiking? (could reflect information or risk repricing)
Is the underlying stock thinly traded relative to option flows? (higher sensitivity)
Is expiration imminent and gamma exposure high? (amplifies short‑term moves)

Limitations and a final note

Research shows that option trading can and does affect underlying prices via information transmission, hedging flows, gamma amplification, and exercise mechanics. However, effects are heterogeneous — often modest for highly liquid large caps and larger for smaller, less liquid names or during stressed markets. Identification challenges mean the precise causal magnitude is still an active area of research.

Further exploration: use Bitget’s options and spot market data to watch these dynamics in real time, apply delta‑weighted measures to translate option flows into estimated stock trading pressure, and monitor expirations and open interest concentration to understand short‑term risks.

Want hands‑on monitoring? Explore Bitget’s options dashboards and Bitget Wallet to track open interest, implied volatility and delta‑weighted flows that help you answer the practical question: does option trading affect stock price for the assets you care about.

As of 2026-01-22, academic and market reports — including published papers in leading journals and exchange data reviews — continue to document measurable but heterogeneous effects of option trading on underlying prices.

The content above has been sourced from the internet and generated using AI. For high-quality content, please visit Bitget Academy.