Abstract

http://ssrn.com/abstract=2005763
 
 

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The Information Content of Option Demand


Kerstin Kehrle


Independent

Tatjana Xenia Puhan


University of Mannheim - Department of International Finance; Swiss Life Asset Managers

October 26, 2014

Swiss Finance Institute Research Paper No. 12-43

Abstract:     
This paper combines the concept of market sidedness with excess option demand (changes in open interest) to solve the empirical challenge of separating directional from uninformed trading motives in widely available, unsigned options data. Our measure of options market sidedness persistently predicts the sign and strength of 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 27% (32%) 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: 59

Keywords: Option Demand, Market Sidedness, Open Interest, Liquidity, Market Microstructure

JEL Classification: D82, G10, G12, G14


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Date posted: October 16, 2012 ; Last revised: October 26, 2014

Suggested Citation

Kehrle, Kerstin and Puhan, Tatjana Xenia, The Information Content of Option Demand (October 26, 2014). Swiss Finance Institute Research Paper No. 12-43. Available at SSRN: http://ssrn.com/abstract=2005763 or http://dx.doi.org/10.2139/ssrn.2005763

Contact Information

Kerstin Kehrle
Independent ( email )
Tatjana Xenia Puhan (Contact Author)
University of Mannheim - Department of International Finance ( email )
L9, 1-2
Mannheim, 68131
Germany
Swiss Life Asset Managers ( email )
General-Guisan-Quai 40
Zurich, 8022
Switzerland
HOME PAGE: http://www.swisslife-am.com/de/home.html
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