The Information Content of Option Demand
Tatjana Xenia Puhan
University of Zurich; Swiss Finance Institute
February 21, 2014
Swiss Finance Institute Research Paper No. 12-43
This paper combines the concept of market sidedness with excess option demand (changes in open interest) to construct a new measure of the sign and magnitude of directional information in publicly available options market data. The measure of options market sidedness persistently predicts stock returns. Trading strategies conditional on the measure are highly profitable. For instance, when the measure indicates positive (negative) information, out-of-the-money calls (puts) generate returns of 22% (26%) over roughly four weeks. Risk-adjusted returns of a long-short equity strategy yield more than 2%. An increase in directionally informed demand predicts a decrease in option liquidity and increases in pricing inefficiency.
Number of Pages in PDF File: 52
Keywords: Option Demand, Market Sidedness, Open Interest, Liquidity, Market Microstructure
JEL Classification: D82, G10, G12, G14working papers series
Date posted: October 16, 2012 ; Last revised: February 21, 2014
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