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RFS Advance Access published online on February 17, 2006
Review of Financial Studies, 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

Article

The Information in Option Volume for Future Stock Prices

Jun Pan 1 *, Allen M. Poteshman 2, and forthcoming, Review of Financial Studies
1 MIT Sloan School of Management and NBER, Cambridge, MA 02142
2 University of Illinois at Urbana-Champaign

* To whom correspondence should be addressed.
Jun Pan, E-mail: junpan{at}mit.edu


  Abstract

We present strong evidence that option trading volume contains information about future stock prices. Taking advantage of a unique dataset, 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 one percent 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 ineffciency. We also find greater predictability for stocks with higher concentrations of informed traders and from option contracts with greater leverage.


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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.
[Abstract] [Full Text] [PDF]


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