The Information in Hedge Fund Option Holdings

Amber Anand (), Jian Hua () and Andy Puckett ()
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Amber Anand: Syracuse University, Syracuse, New York 13244
Jian Hua: Baruch College-CUNY, New York, New York 10010
Andy Puckett: University of Tennessee, Knoxville, Tennessee 37996

Management Science, 2024, vol. 70, issue 3, 1832-1854

Abstract: We provide new insights on how hedge funds use options and short-selling channels to trade on their negative information. Bearish information in hedge fund option positions is economically large, distinct from information in short interest, and it is the combination of option positions and short interest that provides the strongest information signal. A portfolio of stocks with high short interest and bearish hedge fund option positions predicts negative abnormal returns that are more than four times as large as the portfolio with high short interest and bullish options positions. The information in hedge fund option positions increases during periods of market stress, whereas that in short interest does not. This increase is concentrated in capital-constrained hedge funds, suggesting that options provide a channel for capital-constrained hedge funds to exploit their information advantage.

Keywords: hedge funds; options; short sales; crisis (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:3:p:1832-1854

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