The directional information content of options volumes

Abstract

This study examines the directional information content realized by trades in a highly liquid options market by constructing put–call volume ratios and decoupled options‐to‐spot volume ratios. By investigating whether the specific investor type predicts underlying returns and the method used to exploit a directional information advantage, we find that foreign investment firms can leverage their directional information by executing buy trades to open new positions. Their open‐buy trades significantly predict next‐day spot returns, whereas trades initiated by domestic firms do not. This relationship becomes stronger for out‐of‐the‐money, large, and short‐horizon options trades and during the short‐sale restriction period.

The impact of net buying pressure on index options prices

“…In sum, after controlling for the order imbalance in the index futures market, which may reflect options traders' hedging demand, the results in Table 5 suggest that the net buying options trades convey information about changes in the prices of options and their underlying assets (Chang, Hsieh, & Lai, 2009; Pan & Poteshman, 2006; Ryu & Yang, 2018). Although both types of informed trading significantly explain changes in the options‐implied volatility, the impact of directional trading is greater than that of volatility trading in the call options market.…”

Show me the money: Option moneyness concentration and future stock returns

“…However, several studies on option markets' contribution to stock price discovery find options play a limited role (Chan, Chung, & Fong, 2002;Chan, Chung, & Johnson, 1993;Finucane, 1999;Holowczak, Simaan, & Wu, 2006;Muravyev, Pearson, & Broussard, 2013;Stephan & Whaley, 1990;Vijh, 1990). Yet, other studies document evidence of significant stock return predictability using option volume measures, including putcall ratios, option-to-stock volume ratios, options order flow or order imbalances, and option volume itself (Blau, Nguyen, & Whitby, 2014;Ge et al, 2016;Hu, 2014;Johnson & So, 2012;Pan & Poteshman, 2006;Roll, Schwartz, & Subrahmanyam, 2010;Ryu & Yang, 2018). 3 Another branch of this literature examines stock return predictability of option pricing measures.…”

The impacts of public news announcements on intraday implied volatility dynamics

“…In constructing these implied volatilities, we also consider the moneyness of options, which measures the degree of an option's leverage and is defined as the ratio of the underlying (strike) price to the strike (underlying) price for a call (put). Following Ryu and Yang (), an options contract is counted as OTM if its moneyness value is lower than 0.975, as ATM if its moneyness value is between 0.975 and 1.025, and as ITM if its moneyness value exceeds 1.025. We construct the average implied volatility ( IV ), call‐implied volatility ( IV_CALL ), put‐implied volatility ( IV_PUT ), ITM‐implied volatility ( IV_ITM ), ATM‐implied volatility ( IV_ATM ), and OTM‐implied volatility ( IV_OTM ) for this study, and we calculate each volatility measure as the volume‐weighted average implied volatility at each moneyness interval.…”

“…In fact, spread sizes, depths, investor participation rates, and degrees of informed trading differ significantly across KOSPI 200 options contracts at different moneyness levels. Options investors’ trading motives and transaction characteristics also differ by the option moneyness level that the investors choose (Chung, Park, & Ryu, ; Ryu & Yang, ). Previous studies on the KOSPI 200 options market show stark differences in the leverage, investor composition, order size, and information content of the ITM and OTM options markets (Kim & Ryu, ; Yang, Kutan, & Ryu, ).…”