I would guess that only when an option is exercised that the stock price is affected. Is that correct?
Option trades are important to stock prices in several ways, particularly low-volume stocks:
1) If there is a big option trade, it could be an indication that the "smart money" knows something. For example, the SEC is investigating some March BSC puts at $2.5 that were bought while BSC was in the 50s two weeks ago
2) I’ve found that for low-volume stocks, stock prices often "stick" near option strike prices near expiration. For example, if the strike prices are $20, $25, $30, then the stock would be more likely to trade near $19-21, $24-26, $29-31, etc. during expiration week.
3) The put/call ratio is often a good contrarian indicator for price movement. When the option market is extremely pessimistic, lots of puts are sold (the buyers think the stock will go down) so the ratio goes up. The market usually ends up higher when the put/call ratio spikes up.
BTW, as others have mentioned, I don’t think that option exercising affects the prices much either.
Maybe this article could help you
http://www.101stockinvestments.com/Options-Trading-Volatility.html
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Options are derivatives of stocks, so trading options has no effect on stock prices.
You could hypotesize about possible secondary effects such as a fluctuation due to a large amount of exercised contracts or perhaps a larger quantity of short sales hedged by cheap option contracts. The effects are likely negligible.
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<<<How do option trades affect stock prices?>>>
Simple answer: They don’t.
Long Answer:
There are several types of risk associated with options positions, one of the biggest of which is called "delta" and represents how much the position will gain or lose as the price of the stock changes. Market makers almost always want to hedge their risks, and to hedge their delta risk they often buy or sell the underlying stock.
So, for example, if a stock is selling for $49.50 per share and I bought 1,000 April call options with a strike price of $50 from a market maker that would decrease the market makers delta by roughly 50,000. To decrease that risk he would probably buy 50,000 shares of the stock. A transaction that size could have a temporary, minor impact on the price of the stock.
When option expirations approach delta risk can change rapidly and market makers may be buying or selling shares to position themselves for expiration. That can increase the volatility of stock price during the "witching hour" (the last hour of trading on the third Friday of the month).
<<<I would guess that only when an option is exercised that the stock price is affected. Is that correct?>>>
Not really.
It is fairly predictable when an option is likely to be exercised so anyone short an option should be prepared for assignment. For example, a market maker knowing he is about to be assigned 30 call options will already have 3,000 shares in his inventory ready to be sold. The exercise/assignment process has no significant impact on his risk and do not require adjustments that could have an impact on the stock price.
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BTW, the article referenced in the first answer has nothing to do with your question.
References :
Experience
Option trades are important to stock prices in several ways, particularly low-volume stocks:
1) If there is a big option trade, it could be an indication that the "smart money" knows something. For example, the SEC is investigating some March BSC puts at $2.5 that were bought while BSC was in the 50s two weeks ago
2) I’ve found that for low-volume stocks, stock prices often "stick" near option strike prices near expiration. For example, if the strike prices are $20, $25, $30, then the stock would be more likely to trade near $19-21, $24-26, $29-31, etc. during expiration week.
3) The put/call ratio is often a good contrarian indicator for price movement. When the option market is extremely pessimistic, lots of puts are sold (the buyers think the stock will go down) so the ratio goes up. The market usually ends up higher when the put/call ratio spikes up.
BTW, as others have mentioned, I don’t think that option exercising affects the prices much either.
References :