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The Information of Option Volume for Future Stock Prices

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Listed author(s):
  • Jun Pan
  • Allen Poteshman
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Abstract

We present strong evidence that option trading volume contains information about future stock price movements. Taking advantage of a unique dataset from the Chicago Board Options Exchange, we construct put-call ratios from option volume initiated by buyers to open new positions. On a risk-adjusted basis, stocks with low put-call ratios outperform stocks with high put-call ratios by more than 40 basis points on the next day and more than 1% over the next week. Partitioning our option signals into components that are publicly and non-publicly observable, we find that the economic source of this predictability is non-public information possessed by option traders rather than market inefficiency. We also find greater predictability from option signals for stocks with higher concentrations of informed traders and from option contracts with greater leverage.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10925.

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Date of creation: Nov 2004
Publication status: published as Pan, Jun and Allen M. Poteshman. "The Information In Option Volume For Future Stock Prices," Review of Financial Studies, 2006, v19(3,Fall), 871-908.
Handle: RePEc:nbr:nberwo:10925
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  • G1 - Financial Economics - - General Financial Markets

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