Abstract

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The Information Content of Option Demand


Kerstin Kehrle


Independent

Tatjana Xenia Puhan


University of Zurich; Swiss Finance Institute

February 21, 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 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, G14

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Date posted: October 16, 2012 ; Last revised: February 21, 2014

Suggested Citation

Kehrle, Kerstin and Puhan, Tatjana Xenia, The Information Content of Option Demand (February 21, 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 Zurich ( email )
Plattenstrasse 32
Zürich, CH-8032
Switzerland
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
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