Informational Role of Options Open Interests and Volume in Forecasting Future Prices: A Study on Indian Market

Rajesh Pathak and Nikhil Rastogi

The IUP Journal of Financial Economics, 2010, vol. VIII, issue 3, 49-61

Abstract: This study investigates the informational role of options open interests and volume in predicting the future stock prices in Indian market. Most of the time, the uninformed traders lose to informed traders because they neither have private information nor the sophisticated knowledge to process the publicly available information. The most closely watched data are also the least informative. This study is an attempt to find out if the daily published and publicly available options data are informative and can be used to forecast the future stock price at maturity. Then the retail traders and investors will be able to minimize their loss to informed traders and enhance their portfolio performance. The sample of this study is 17 highly traded Nifty 50 index stocks from different sectors having significant share in the index. Predictors based on options price and options volume have been estimated, following Bhuyan and Williams (2004), and then used in the regression model as predictor variables of price at maturity both jointly and in isolation. The period of study covers stock options contract of three months (July-September 2009). Only near month contract is considered for the study because of liquidity concern. The coefficients of predictors are found to be significant and not statistically different across the study period. Consistent with the results of the previous studies, the results show that options open interest and volume are relevant in forecasting future prices.

Date: 2010
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