Do Option Open-Interest Changes Foreshadow Future Equity Returns?

Abstract:     
Recent work has considered whether information is simultaneously reflected in both option and equity markets. We provide new evidence supporting Black’s (1975) conjecture that information is first revealed in option markets. Specifically, changes in call and put open interest levels have predictive power for future equity returns. Large increases in put open interest are followed by poor equity returns. Call open interest increases precede relatively strong future returns but the relationship is considerably less pronounced. The recent change in the call-to-put open interest ratio most strongly predicts equity returns over the following few weeks, even after controlling for traditional factors.

Number of Pages in PDF File: 29

working papers series