The Information Content of Option Demand

Kerstin Kehrle and Tatjana Xenia Puhan
Additional contact information
Kerstin Kehrle: Independent
Tatjana Xenia Puhan: University of Mannheim and Swiss Life Asset Managers

No 12-43, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper combines the concept of market sidedness with excess option demand (changes in open interest) to solve the empirical challenge of separating directional from uninformed trading motives in widely available, unsigned options data. Our measure of options market sidedness persistently predicts the sign and strength of stock returns. Trading strategies conditional on the measure are highly profitable. For instance, when the measure indicates positive (negative) information, out-of-the-money calls (puts) generate returns of 27% (32%) over roughly four weeks. Risk-adjusted returns of a long-short equity strategy yield more than 2%. An increase in directionally informed demand predicts a decrease in option liquidity and increases in pricing inefficiency.

Keywords: Option Demand; Market Sidedness; Open Interest; Liquidity; Market Microstructure (search for similar items in EconPapers)
JEL-codes: D82 G10 G12 G14 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2012-10
New Economics Papers: this item is included in nep-cfn and nep-mst
References: Add references at CitEc
Citations:

Downloads: (external link)
http://ssrn.com/abstract=2005763 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1243

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().