Option Prices As A Time Machine

Equity option traders are some of the most skillful investors in the market. We cannot all have their skills, but we can use information from option prices to extract useful information about traders’ expectations of the future behavior of the underlying equity. In this article we discuss the Risk Neutral Density, which is an estimate of the future distribution of equity prices. In this sense, option prices contain forward-looking information that, incredibly enough, permit us to peek into the future as though we had a time machine.