The Option to Stock Volume Ratio and Future Returns

61 Pages Posted: 25 Jul 2010 Last revised: 7 Jun 2013

Travis L. Johnson

The University of Texas at Austin - Department of Finance

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: April 31, 2011

Abstract

We examine the information content of option and equity volumes when trade direction is unobserved. In a multimarket symmetric information model, we show that equity short-sale costs result in a negative relation between relative option volume and future firm value. In our empirical tests, firms in the lowest decile of the option to stock volume ratio (O/S) outperform the highest decile by 1.47% per month on a risk-adjusted basis. Our model and empirics both indicate that O/S is a stronger signal when short-sale costs are high or option leverage is low. O/S also predicts future firm-specific earnings news, consistent with O/S reflecting private information.

Keywords: Options, Volume, Microstructure, Short Sale Costs

JEL Classification: G14, G11, G12

Suggested Citation

Johnson, Travis L. and So, Eric C., The Option to Stock Volume Ratio and Future Returns (April 31, 2011). Journal of Financial Economics (JFE), 106(2): 262-286 (November 2012). Available at SSRN: https://ssrn.com/abstract=1624062 or http://dx.doi.org/10.2139/ssrn.1624062

Travis L. Johnson (Contact Author)

The University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/johnson

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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