The Information Content of Option Ratios
Benjamin M. Blau
Utah State University - Huntsman School of Business
Ohio University; Texas Tech University
Ryan J. Whitby
Utah State University
May 16, 2013
A broad stream of research shows that information flows into underlying stock prices through the options market. For instance, prior research shows that both the Put-Call Ratio (P/C) and the Option-to-Stock Volume Ratio (O/S) predict negative future stock returns. In this paper, we compare the level of information contained in these two commonly used option volume ratios. Our comparison of the return predictability contained in these ratios yields some new results. First, we find that P/C ratios contain more predictability about future stock returns at the daily level than O/S ratios. Second, in contrast to our first set of results, O/S ratios contain more predictability about future returns at the weekly and monthly levels than P/C ratios. In fact, our tests show that while P/C ratios contain predictability about future daily returns and, to some extent, future weekly returns, the return predictability in P/C ratios is fleeting. O/S ratios, on the other hand, significantly predict negative returns at both the weekly and monthly levels, respectively.
Number of Pages in PDF File: 29
Keywords: Put-Call Ratios, Option Volume-to-Stock Volume Ratio, Informed Trading, Return Predictability
Date posted: May 17, 2013
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