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RFS Advance Access originally published online on February 17, 2006
Review of Financial Studies 2006 19(3):871-908; doi:10.1093/rfs/hhj024
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

The Information in Option Volume for Future Stock Prices

Jun Pan
MIT Sloan School of Management and NBER

Allen M. Poteshman
University of Illinois at Urbana-Champaign

Address correspondence to Jun Pan, MIT Sloan School of Management, Cambridge, MA 02142, or e-mail: junpan{at}mit.edu.

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.


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 REV FINANC STUDHome page
H. H. Cao and H. Ou-Yang
Differences of Opinion of Public Information and Speculative Trading in Stocks and Options
Rev. Financ. Stud., March 27, 2008; (2008) hhn020v1.
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