The Wisdom of Crowds
We’ve all been taught that the price of a stock leverages the “wisdom of the crowd” to correctly price in everything that is known about that asset at that time. When analysts, pundits, and talking heads predict which direction the price of the stock is going to move – they are relying on historical data and past trends to predict the future.
As futile as this seems (and it generally is), if the “wisdom of the crowd” is accurate, then it would seem that past technical analysis or anecdotal hypotheses are the only tools we have to predict future direction of the stock. Based on this assumption, most investors are left “throwing darts” hoping to get lucky more often than they don’t.
There is, however, a better way.
The Wisdom of a Different Crowd
While a stock price captures the “wisdom of the past”, the options market on those same underlying stocks capture the wisdom of a crowd with its eye on the future. Unlike pundits and analysts who generally lack skin in the game, options investors use real money to signal where they think a stock is going to move in the near, medium, or distant future.
In theory, if we could “sum up” the sentiment of the options trades on a stock, we could gain powerful insight into its expected direction. In practice, of course – this becomes difficult. With hundreds of thousands of options trades every day, it can seem impossible to pull any signal out of the firehose of sentiment signals built into those trades. But it can be done.
Quantified Sentiment – the Crystal Ball on Stock Movement
Over 5 years of iteration with hundreds of computers analyzing 500k+ options trades each day, we have evolved a powerful machine learning model that can find the prevailing sentiment on 1,300 equities at any point in time. Through the learning from our AI model, we’ve developed 40 proprietary predictive metrics, and we use these metrics on a daily basis to convert the raw wisdom of the options market into actionable signals on whether a stock is likely to go up, hold steady, or go down.
This is the power of the wisdom in the options markets – and Kosha’s ability to take the pulse of those markets to predict market direction.
We put together a short video explaining how it works in more detail. If you watched it, you saw how Kosha vastly outperformed the market on a model portfolio of 10 household name equities. If you haven’t seen the video yet – you can watch it here: