Comparing the Information in Short Sales and Put Options

26 Pages Posted: 23 Feb 2009 Last revised: 21 Aug 2011

See all articles by Benjamin M. Blau

Benjamin M. Blau

Utah State University - Huntsman School of Business

Chip Wade

University of Mississippi

Date Written: August 19, 2011

Abstract

Prior work shows that both short sales and put options contain information about future stock prices. In this study, we compare the return predictability in short sales to the return predictability in put options. The motivation for this comparison is based on the theoretical argument that informed traders can choose between short sales and put options when establishing short positions in a particular stocks. Results in this paper suggest that the underperformance of stocks with high short-selling activity is approximately four times larger than the underperformance of stocks with high put-option activity. While stocks that are most likely to face binding short-sale constraints drive the underperformance caused by put-option activity, we still find that short sale are generally more informative about future prices.

Keywords: Short Selling, Options, Informed Trading

Suggested Citation

Blau, Benjamin M. and Wade, Chip, Comparing the Information in Short Sales and Put Options (August 19, 2011). Available at SSRN: https://ssrn.com/abstract=1348133 or http://dx.doi.org/10.2139/ssrn.1348133

Benjamin M. Blau (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

Chip Wade

University of Mississippi ( email )

Oxford, MS 38677
United States

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