O/S: The Relative Trading Activity in Options and Stock
52 Pages Posted: 28 May 2009 Last revised: 2 Oct 2009
Date Written: June 13, 2009
Relatively little is known about the trading volume in derivatives relative to the volume in underlying stocks. We study time-series properties and the determinants of the options/stock trading volume ratio (O/S) using a comprehensive cross-section and time-series of data on equities and their listed options. O/S is related to many intuitive determinants such as delta and trading costs, and it also varies with institutional holdings, analyst following, and analyst forecast dispersion. O/S is higher around earnings announcements (suggesting increased trading in the options market), and higher O/S predicts lower abnormal returns after the earnings announcement, suggesting that options trading improves market efficiency.
Keywords: derivatives volume, stock volume, market efficiency
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation