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The information content of option ratios

Benjamin Blau (), Nga Nguyen and Ryan Whitby ()

Journal of Banking & Finance, 2014, vol. 43, issue C, 179-187

Abstract: A broad stream of research shows that information flows into underlying stock prices through the options market. For instance, prior research shows that both the Put–Call Ratio (P/C) and the Option-to-Stock Volume Ratio (O/S) predict negative future stock returns. In this paper, we compare the level of information contained in these two commonly used option volume ratios. First, we find that P/C ratios contain more predictability about future stock returns at the daily level than O/S ratios. Second, in contrast to our first set of results, O/S ratios contain more predictability about future returns at the weekly and monthly levels than P/C ratios. In fact, our tests show that while P/C ratios contain predictability about future daily returns and, to some extent, future weekly returns, the return predictability in P/C ratios is fleeting. O/S ratios, on the other hand, significantly predict negative returns at all levels: daily, weekly, and monthly. While Pan and Poteshman (2006) show that signed P/C ratios, which require proprietary data, have predictive power, we find that unsigned P/C ratios, which do not require proprietary data, also have predictive power.

Keywords: Put-Call Ratio; Option-to-Stock Volume Ratio; Informed trading; Return predictability (search for similar items in EconPapers)
JEL-codes: G10 G14 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.jbankfin.2014.03.023

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Handle: RePEc:eee:jbfina:v:43:y:2014:i:c:p:179-187