Option volume and stock returns: evidence from single stock options on the Korea Exchange

Informed traders may prefer the options market to the stock market for reasons including the leverage effect, transaction costs, restrictions on short sale. Many studies try to predict future returns of stocks using informed traders' behavior in the options market. In this study, we examine whether the trading volume ratios of single stock options have the predictive power for future returns of the underlying stock. By analyzing the stock price responses to the “preliminary announcement of performance” of 36 underlying stocks on the Korea Exchange from November 2014 to March 2021 and the trading volume of options written on those stocks, we investigate the relation between the option ratios, which are the call option volume to put option volume ratio (C/P ratio) and the option volume to stock volume ratio (O/S ratio), and the future returns of the underlying stock. We also examine which ratio is better in predicting the future returns. The authors found that both option ratios showed the statistically significant predictability about future returns of the underlying stock and that the return predictability of the O/S ratio is more robust than that of the C/P ratio. This study shows that indicators generated in the options market can be used to predict future underlying stock returns. Further, the findings of this study contributed to a dearth of literature pertaining to single stock options. The results suggest that the single stock options market is efficient and influences the price discovery in the stock market.

Informational role of futures volume for spot volatility

Purpose The paper aims to explore the informational role of futures volume in the simultaneous relationship between option volume and spot volatility to forecast the volatility of the underlying asset. Design/methodology/approach The generalized method of moments is used to estimate the simultaneous equations of endogeneity between spot volatility and option volume. Futures volume is specified as an exogenous variable in both legs of the estimation of simultaneous equations. However, the future volume is also tested as a dependent variable to prove preference for investment by informed investors in futures along with options. Findings The result indicates that futures volume has a significant association with the bi-directional simultaneous equation estimation between spot volatility and option volume. Moreover, the result of this paper proves that informed investors also prefer futures markets over the spot market. However, there is no change observed in the relationship between option volume and spot volatility due to either call or put options or moneyness. Originality/value The possible role of futures volume in the simultaneous equations between spot volatility and option volume has not yet been researched. This paper pioneers in demonstrating that futures volume is an exogenous variable in the simultaneous equation modeling between spot volatility and option volume. Moreover, in the contemporaneous as well as predictive relationships between spot volatility and option volume, futures volume as an exogenous variable is significant in forecasting spot volatility. In addition to this, the current paper uniquely provides evidence of investment in futures also over the spot market by informed investors.

Informed Options Trading Prior to Takeover Announcements: Insider Trading?

We quantify the pervasiveness of informed trading activity in target companies’ equity options before the announcements of 1,859 U.S. takeovers between 1996 and 2012. About 25% of all takeovers have positive abnormal volumes, which are greater for short-dated, out-of-the-money calls, consistent with bullish directional trading before the announcement. Over half of this abnormal activity is unlikely due to speculation, news and rumors, trading by corporate insiders, leakage in the stock market, deal predictability, or beneficial ownership filings by activist investors. We also examine the characteristics of option trades litigated by the Securities and Exchange Commission (SEC) for alleged illegal insider trading. Although the characteristics of such trades closely resemble the patterns of abnormal option volume in the U.S. takeover sample, we find that the SEC litigates only about 8% of all deals in it. This paper was accepted by Lauren Cohen, finance.

Short-Sale Constraints and Options Trading: Evidence from Reg SHO

We examine the effects of a temporary suspension of short-sale price tests on the options market. Consistent with the notion that put option trading substitutes for short selling, we find a significant reduction in put option volume. In addition, pressure on put option prices significantly declines, violations of the put-call parity become significantly less frequent, and option volume becomes less informed. Our findings add clarity to a long-standing debate on whether investors use options to circumvent equity short-selling restrictions.

The Impact of Options Trading on the Relationship between Research Quotient and Firm Performance

The performance of innovation could be counted by the number of patent. Patent information enables a firm to estimate R&D efficiency and stock market value. Nonetheless, patents is not universal because more than 50% companies in COMPUSTAT do not patent their new products. Since patents have some drawbacks, Cooper, Knott, and Yang (2015) use Research Quotient (RQ) as an indicator of firm innovation because RQ measures the productivity of the R&D department, which produces a new innovative product and transforms it into revenues. In this paper, we examine the impact of option trading on the relation between RQ and stock market return (or firm value). We find that RQ has the positive impact on firm value, proxy by market-to-book (MTB) value. The option dummy, which is the firm with option trading, has significantly positive impact on the relation between RQ and firm value and insignificantly positive impact on the relation between RQ and future stock return. Nonetheless, interaction term of RQ and option volume has positive and significant impacts on MTB and future stock return.