The Option to Stock Volume Ratio and Future Returns

Johnson, Travis L.; So, Eric C.

doi:10.2139/ssrn.1624062

Cited by 113 publications

(243 citation statements)

References 17 publications

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“…Large stock volume is associated with positive future returns, but large option volume is associated with negative returns. That finding is consistent with a recent paper by Johnson and So (2012), which shows that option-to-stock volume ratio negatively predicts stock returns.…”

Section: Predicting Stock Returns Using Soi and Ooisupporting

confidence: 93%

“…For ATM and ITM options, the percentage bid-ask spreads are only 3.46% and 3%, respectively. This finding is consistent with the theoretical prediction of Johnson and So (2012). If informed traders buy OTM options to gain high leverage, it is likely that they would need to reverse trade positions rather than exercise the options to take profit.…”

Section: Option Leveragesupporting

confidence: 87%

“…Amin and Lee (1997) show that an increase in option open interest before an announcement is related to the direction of the earnings surprise. More recently, Roll, Schwartz, and Subrahmanyam (2010) and Johnson and So (2012) find that the option-to-stock volume ratio predicts the earnings surprise and the cumulative abnormal returns (CAR) around the announcement. If option trading contains private information, the return predictability from OOI should also be prominent around earnings announcements.…”

Section: Earnings Announcementmentioning

confidence: 99%

“…That finding supports the hypothesis that firms with lower institutional ownership are more likely to be subject to short-sale constraints in the stock market because it is more difficult to borrow shares to meet short interests on such stocks. As a result, informed traders with negative news may have to place more orders in the options market as an alternative to short selling (Figlewski and Webb, 1993;Johnson and So, 2012).…”

Section: Introductionmentioning

confidence: 99%

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Does Option Trading Convey Stock Price Information?

2012

SSRN Journal

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An option market maker who executes an option order turns to the stock market to hedge away the underlying stock exposure. Thus, the stock exposure imbalance in option transactions translates directly into order imbalance in stock trades. In this paper, I decompose total order imbalance in stock transactions into the imbalance induced by option transactions and the imbalance induced by stock transactions independent of option trading activities. I find that the stock exposure imbalance induced by option transactions has strong predictive power of stock returns that does not reverse at long horizons. The independent stock order imbalance has a transitory price impact. The option-based stock return prediction increases with the level of information asymmetry, short-sale costs, and options market activity. The option-induced imbalance also predicts cumulative abnormal returns five days before earnings announcements.JEL Classification: G14, G12, G13.

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Section: Predicting Stock Returns Using Soi and Ooisupporting

confidence: 93%

Section: Option Leveragesupporting

confidence: 87%

Section: Earnings Announcementmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Does Option Trading Convey Stock Price Information?

2012

SSRN Journal

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“…Finally, because option markets attract sophisticated and privately informed investors, option prices are more likely to be informationally efficient than equity prices (Black 1975;Easley, O'Hara, and Srinivas 1998;Pan and Poteshman 2006;Johnson and So 2012). This suggests mispricing is less likely to confound option price-based estimates of risk and risk premiums.…”

mentioning

confidence: 99%

Non-Diversifiable Volatility Risk and Risk Premiums at Earnings Announcements

Barth

2014

The Accounting Review

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This study seeks to determine whether earnings announcements pose non-diversifiable volatility risk that commands a risk premium. We find that investors anticipate some earnings announcements to convey news that increases market return volatility and pay a premium to hedge this non-diversifiable risk. In particular, we find evidence of risk premiums embedded in prices of firms' traded options that are significantly positively associated with the extent to which the firms' earnings announcements pose non-diversifiable volatility risk. In addition, we find that volatility risk premiums are concentrated among bellwether firms and result in predictable variation in option straddle returns around earnings announcements. Taken together, our findings show that some earnings announcements pose non-diversifiable volatility risk that commands a risk premium. JEL Classifications: M41; G12; G13; G14

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2015

Finding Alphas

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The Option to Stock Volume Ratio and Future Returns

Cited by 113 publications

References 17 publications

Does Option Trading Convey Stock Price Information?

Does Option Trading Convey Stock Price Information?

Non-Diversifiable Volatility Risk and Risk Premiums at Earnings Announcements

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