Market Maker or Informed Trader: Who Drive the Relationship Between Option Trading and Underlying Returns? Evidence From Shanghai Stock Exchange 50 ETF Options

Using option order imbalance as a proxy for market makers' inventory pressure, we identify a distinct return reversal pattern between option trading activity and underlying asset returns. Specifically, call (put) order imbalances are contemporaneously positively (negatively) associated with underlying returns, followed by rapid reversals in the subsequent period. This reversal stems primarily from temporary price pressures caused by market makers' delta‐hedging activities and remains robust after controlling for multiple factors and across various option classifications. Two empirical scenarios reinforce that option order imbalance reflects market makers' inventory risks rather than informed trading. Additional analyses—including event studies, out‐of‐sample tests, examinations of dynamic hedging behavior, and panel regressions with expanded SSE‐listed exchange traded fund option data—further substantiate these findings. Overall, our results emphasize the critical role of market makers as a noninformational trading channel, significantly shaping the relationship between option trading and underlying asset prices.