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The information in option volume for future stock prices

By Jun Pan and Allen M. Poteshman

Abstract

We present strong evidence that option trading volume contains information about future stock prices. Taking advantage of a unique data set, we construct put-call ratios from option volume initiated by buyers to open new positions. 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 nonpublicly observable, we find that the economic source of this predictability is nonpublic information possessed by option traders rather than market inefficiency. We also find greater predictability for stocks with higher concentrations of informed traders and from option contracts with greater leverage. This article examines the informational content of option trading for future movements in underlying stock prices. This topic addresses the fundamental economic question of how information gets incorporated into asset prices and is also of obvious practical interest. Our main goals are to establish the presence of informed trading in the option market an

Year: 2006
OAI identifier: oai:CiteSeerX.psu:10.1.1.190.1705
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