O/S: The Relative Trading Activity in Options and Stock

52 Pages Posted: 28 May 2009 Last revised: 2 Oct 2009

See all articles by Richard Roll

Richard Roll

California Institute of Technology

Eduardo S. Schwartz

Simon Fraser University (SFU); University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Date Written: June 13, 2009

Abstract

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

Roll, Richard W. and Schwartz, Eduardo S. and Subrahmanyam, Avanidhar, O/S: The Relative Trading Activity in Options and Stock (June 13, 2009). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1410091 or http://dx.doi.org/10.2139/ssrn.1410091

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

Eduardo S. Schwartz

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1953 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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