The Option to Stock Volume Ratio and Future Returns

Johnson, Travis L.; So, Eric C.

doi:10.2139/ssrn.1624062

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The Option to Stock Volume Ratio and Future Returns

Journal of Financial Economics (JFE), 106(2): 262-286 (November 2012)

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

See all articles by Travis L. Johnson

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: 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